Toll Brothers (TOL) has just released its Q4 and FY 2013 numbers, and I'm interested to see if this self-proclaimed American leader of luxury homes continues to recover from the housing crunch a few years ago. I will provide my view on the financial results and the company's balance sheet and will discuss its outlook for next year (financial year 2014 ends in October 2014). This will result in my investment thesis at the end of this article.
My view on the financial results
Toll Brothers reported a revenue of $1.04B in the fourth quarter of 2013, which is a stunning 65% increase compared to the same quarter last year. As the net income was $94.9M, Toll Brothers' net margin is just over 9%, which is excellent. It makes no sense to compare the $94.9M quarterly profit to the $411.4M profit in the same period last year, as in 2013 Toll Brothers had to pay $55.2M in income taxes, whereas it received a tax credit of in excess of $350M last year.
For the entire year 2013, Toll's net profit was $170.6M or $1.01/share, which means the majority of its profit was earned in the fourth quarter of this year, which 'saved' the year for Toll. I'd like to emphasize that Toll's operating margin (operating income / revenue) more than doubled this year, from 3.36% last year to a very healthy 7.52% this year, which also bodes well for the future.
I also always like to have a look at the cash flow numbers of a company, as I think the cash flow statements give a better indication on the quality of the underlying business. Unfortunately, the quarterly financial results have not been filed with the SEC yet at this time (but I expect the numbers to be published later today).
My view on the balance sheet
Let's now move over to the balance sheet. Toll Brothers was able to increase its total balance sheet by in excess of 10% to $6.8B. The total leverage ratio increased, as the equity portion of the balance sheet increased by just 6.75% to $3.33B. This results in a book value per share of $19.69, which is an increase compared to last year of approximately $1.01/share. This means Toll Brothers is currently trading at a price/book value of 1.70.
It's also interesting to see that the company is stepping up its investment in foreclosed homes, as it increased its position in foreclosed real estate by 25% to $73M. If the housing market continues to improve, this might be an excellent move from the company as I can imagine that selling those foreclosed assets at a better time might result in excellent returns on this investment.
Investors might want to keep an eye on the increased inventory, as the current value is approximately 25% higher than at the same period last year. I'm very interested to see how and if Toll Brothers will reduce the dollar amount of inventory on its balance sheet.
After closing the quarter, Toll Brothers announced it planned to acquire Shapell Homes in California, which would increase the company's exposure in that region. This is quite a large acquisition, as Shapell's portfolio mainly consists of 5,200 home sites at prime locations. As Toll Brothers currently owns approximately 4,000 land lots in the state, this acquisition will more than double the company's land position and puts it in a very strong position.
This acquisition comes with a hefty price tag of $1.6B, which will be financed through debt and equity. Equity will consist of just 10-15% of the total price, and Toll Brothers already issued 6.25M new shares at $32 per share, which brought in $200M before expenses. I believe this acquisition positions Toll Brothers in a desirable position on the Californian real estate market, but let's hope this doesn't add too much leverage to the company's balance sheet.
Toll Brothers had an excellent fourth quarter, and let's hope it can continue this performance into 2014. I'm also keen to see which impact the acquisition of Shapell will have on its 2014 financial results, but I also think this acquisition will put further share repurchases on the back burner, as Toll Brothers will probably focus on reducing its net debt position in the next few years.
Toll Brothers is an excellent company to get exposure to a recovering market for luxury homes, but the company is quite expensive at $33.58. As such, I would prefer to write a put option whereby I would collect the option premium whilst waiting for a declining share price. I'm particularly looking at a June 2014 Put 27 for an option premium of $0.90. If Toll Brothers drops below the strike price by expiration date I will get assigned to purchase shares at $27 a piece (which is a Price/Book value of just under 1.40). If Toll Brothers is trading higher than $27/share, I just keep the option premium in my pockets, which results in an annualized yield of 6.15%.
Additional disclosure: I have no position in TOL and no intention to initiate a position, but I might write a long-term out of the money put option, as described in the article.