Toll Brothers: Building Profits In A Challenging Real Estate Market

| About: Toll Brothers (TOL)

Toll Brothers (NYSE:TOL) is a luxury homebuilder with operations in 50 affluent markets in 21 states. I'm bullish long term on Toll Brothers because it is a well run company that has handled this slow economy well. Now this is not a bullish call on the whole housing sector; there is still a very strong possibility the housing market will slow and the economy could enter another recession.

Here are some positives that I like about this trade:

  • Toll Brothers has a big presence in the metro-DC-to Boston Corridor and has a high rise business in the Metro New York city region. These markets have been performing well during this economic slowdown and have seen signs of stabilization. Toll Brothers has done well keeping most of the business out of hard-hit markets like California, and Florida.
  • Toll Brothers recently reported strong third quarter net income of $42.1 million compared with $27.3 million, in the same quarter, 2010. Toll Brothers was able to achieve this, even when seeing a decrease in the amount of home building deliveries. Toll Brothers saw deliveries decrease 14% compared with the same quarter last year.
  • Toll Brothers currently has a backlog of 1,780 units. This has a contract value of $1.02 billion upon delivery. This represents an increase of 8% compared with the previous year. The current average cancellation rate is 7.4%, which is pretty consistent with the company's pre-downturn historical averages. TOL buyers typically have a strong financial profile, which enables them to secure mortgage financing in this economic environment.
  • Toll Brothers expects to gain market share in certain markets. The tough economy has caused many small- and medium-sized builders to exit the market, This allows larger well capitalized companies to gain market share. For example, eight out of the ten builders that competed in the Philadelphia luxury market have gone out of business.
  • TOL recently bought $75 million of land this quarter, with nearly half located in Manhattan. TOL will continue to execute on strategic deals that I feel will provide value for the company.

I'm bullish on Toll Brothers with the belief that once the economy recovers, TOL will be a leader in the homebuilding segment. This will definitely be a long-term play but could turn out well for patient investors.

The risk to this trade of course is if the economy were to slow substantially. If that were to happen then there is a possibility that TOL may retest the low of $10. This low hasn't been seen since 2003. I buy at multiple prices, so be sure to size your risk correctly or wait for more confirmation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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