Excitement Could Fade Again After Another Toll Brothers Earnings Surprise

For the second straight quarter, Toll Brothers provided a preliminary quarterly report that ignited the stock as sales volumes once again surpassed expectations. Robert I. Toll, chairman and CEO, explains:

Our fourth-quarter unit deliveries exceeded the high end of our range of guidance due to the delivery of a higher percentage of our backlog, fewer cancellations, and the sale of quick delivery homes.

Toll (appropriately) peppers his enthusiasm with a healthy dose of caution:

We have definitely progressed from one year ago. The shock to the financial system in mid-September 2008 that shut down the capital markets appears to be mostly behind us. The improvement in consumer confidence over the past year, the increasing stabilization of home prices, the decline in unsold home inventories and the reduction in buyer cancellation rates suggest that the new home market should be improving; we sense that it is, though slowly and through choppy waters…

Home buyers began to emerge from their bunkers in late March 2009 and the market continued to gain momentum up to Labor Day. Since then demand has been volatile: This may be due in part to typical seasonality, but the more likely cause is concern about unemployment and the overall economy.

[Read the full earnings call transcript here.]

In the end, the news propelled Toll Brothers' (TOL) stock to a closing gain of 16%. However, TOL remains 8.5% below August’s high. At that time (Aug 12th), TOL reported its 3rd quarter preliminary report and the market enthusiastically responded with a closing gain of 14%, testing an 8-month high. From the 3rd quarter preliminary report to October’s lows, TOL lost 26% in value. TOL also lost 17.7% from the time it announced its 2nd quarter preliminary report on May 20th to the July lows.

This time may be no different. I continue to suspect that this year’s massive insider selling – $45.0M in March and April and $15.6M in September – signals that lower, not higher prices, will dominate TOL’s trading for the near-term.

Insider sales

The first chart below shows the timeline of preliminary reports and insider selling. The second chart displays TOL’s recent range-bound trading. If TOL manages to surpass August’s high in short-order, the chart might finally begin to look more bullish. Also note well that TOL shares traded in record volume on Wednesday. The 24.5M shares traded were six times greater than the current daily average. The previous record was set on Nov 8, 2005 when 16.6M shares traded. On that day, TOL dropped 14% in price as it continued its slide down the peak of the housing bubble. 14.3M shares traded during TOL’s August preliminary earnings report.

Click to enlarge:

Timeline of prelim reports and insider selling (Click to enlarge)

TOL's range-bound trading (weekly chart)

Be careful out there!

Full disclosure: Long TOL puts

Comments

[chris coonan:]

They are right to be worried about unemployment. People with no jobs can't get mortgages.

Nov 12 05:38 AM

[apppro:]

Just little over 1 year ago we allowed all those pundits and short sellers to double the unemployment rate in 3 months. We went from 4.5% (high but acceptable) in September '08 to 9% in 3 months.
Why did we allow this unprecedented rate?
Why have we not addressed the conditions that allow a few to bash and destroy through trading schemes that should be prosecuted under RICO Statutes?
Why do we all continue to allow a few to force us into Armegeddon 2?

Revised Tax Rules:

1. Capital gains under <6 months - 55% tax on capital gains
2. Capital gains 6 > 12 months - 45% tax on capital gains
3. Capital gains 1 > 2 years - 35% tax on capital gains
4. Capital gains 2 > 5 years - 18% tax on capital gains
5. Capital gains 5+ years - 5% tax on capital gains
6. Most critical of all — Institute a capital gains tax of 55% on ALL short sales not directly tied to a long buy by a licensed hedge fund. I'm tired of paying for the pure shorts 3rd vacation home.

Nov 12 07:24 AM

[sticktoitiv...:]

I don't know where that quarter came from, but they hit the ball out of the park. The big money could be leaving toll on any strength. The thesis behind owning toll was that they could use their horde of cash to buy up land on the cheap, thereby lowering their raw costs for years to come. Toll has already said they just couldn't get the land they wanted at the price they wanted.

Nov 12 01:32 PM