The high-end homebuilder Toll Brothers (TOL) reports their fiscal first quarter 2013 before the bell on Wednesday morning, February 20th, 2013.
According to ThomsonReuters, analyst consensus is for $0.11 in earnings per share on $501 million in revenue, for expected revenue growth of 56% year-over-year. Given the $0.02 per share loss in earnings per share (EPS) in the year-ago quarter, the percentage growth for EPS is distorted and somewhat meaningless.
EPS estimate revisions
|1/13 q1||10/12 q4||7/12 q3||4/12 q2||1/11 q1|
* Source ThomsonReuters consensus estimates and internal spreadsheet.
As the reader can quickly see, analyst consensus has softened slightly for 2013 (fiscal year end October '13) and for 2014. That could just be a function of waiting on Wednesday's report. Read further to get more flavor on the consensus analyst data.
Expected EPS growth rates from Consensus estimates
* Source: ThomsonReuters data and internal spreadsheet
As the reader can quickly see, fiscal '13's EPS growth rate has slowed more due to the rapid growth in 2012, than any likely slowdown in housing itself.
Since this Wednesday's report is the first fiscal quarter of 2013, management commentary around the results will likely drive revisions to forward estimates.
P/E ratio on historical and forward EPS estimates
|Fiscal y/e||1/12 q1||10/11 q4||7/11 q3||4/11 q2||1/11 q1|
* Source: internal spreadsheet
While the historical P/E ratio matters little, you can see how the P/E ratio for 2013 compares to the expected EPS growth rate for 2013. The only P/E valuation that looks reasonable is 2015's estimate relative to the stock price, but there is more here than meets the eye.
Revenue estimate revisions: 2012 - 2015
* Source: ThomsonReuters estimates and internal spreadsheet
Revenue growth rate revisions
Source: ThomsonReuters and internal spreadsheet
There is a lot of data here, but to boil it down to something helpful prior to TOL's Wednesday morning first quarter release, it looks like revenue growth for 2013 is expected to be better than EPS growth, so watch the gross and operating margins.
Gross margin is expected between 20% - 21% for TOL for Q1 '13.
Valuing homebuilders is tougher than you think: most Street analysts put a 1.5(x) tangible book valuation on the homebuilders, but we've far exceeded those valuations in the last year, thanks to the housing depression that we experienced.
Earnings per share, free cash flow and returns are distorted by:
1.) Tax-loss carry forwards which allow for unreasonably low effective tax rates and distort earnings. In the last 10 quarters, TOL has had a negative tax rate in 7 of those quarters, which has resulted in EPS higher than "normalized" or what would be a considered normal;
2.) There are often numerous joint ventures and other entities within homebuilder financials that muddy the waters. It isn't like analyzing a straight-forward retailer or industrial company;
3.) Cash-flow is also distorted: the capex as detailed on the cash flow statement is often meaningless. You have to see how much undeveloped land has been acquired. For homebuilder capex we use the change in inventory valuation from the balance sheet quarter-to-quarter, but even then that is an estimate, so free cash flow, which we use extensively in our valuation work, has to be handicapped;
4.) Returns on equity and returns-on-invested-capital (ROIC) even today look very low (i.e. 3% - 4%) partially due to the point in the cycle and in part due to the complex nature of real estate and the subsidiaries. It seems like a very tough structure to analyze;
To conclude, our internal model, which uses a forward-earnings estimate and a target P/E ratio puts a fair value on TOL between $40 - $50. Although Morningstar pulled its "intrinsic value" estimates on the homebuilders, they had valued TOL near $23, and LEN in the same area, or nearly half the current market value.
With the 50-year average in housing starts being 1.25 million per year, the December number of 990,000 is still "below trend." The housing and homebuilding recovery is still thought to be in the early innings.
We are watching those revenue estimates, and as long as they continue upward, we think TOL likely will find a bid on any weakness.
We thought in late 2012, that the first run in the homebuilders was over, but TOL is up almost 20% since the November - December earnings report.
The stock peaked near $59 in July '05.
We would add a much bigger weighting in client accounts near $30 per share, and would get nervous about our position over $45, assuming no change in revenue growth.