Seeking Alpha
Recommended for you:
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Toll Brothers (TOL), the homebuilder of luxury homes, ended the week 1% higher. Shares advanced some 3% on Wednesday after the company published its third quarter results. Shares hit the highest levels since the start of 2007.

Third Quarter Results

Toll Brothers reported third quarter revenues of $554.3 million, up 41% on the year. The company delivered 963 units, up 39% on the year. As such, the average price of a delivered unit rose to $576,000. Revenues far surpassed analysts expectations of $505 million.

Net income rose from $42.1 million last year, to $61.6 million in the third quarter of 2012. Earnings per share came in at $0.36 per share, compared to $0.25 last year. Profits were boosted by a tax benefit of $18.7 million, partially offset by an inventory write-down charge of $3.1 million.

The order backlog continues to grow, now totaling $1.62 billion, or 2,559 units. Toll Brothers signed new contracts of $674.4 million during the quarter, up 66% on the year. The number of units signed up rose 57% to 1,119. In comparison, the total backlog in the third quarter of 2011 came in at $1.02 billion.

CEO Douglas Yearly commented on the results, "We are enjoying the most sustained demand we've experienced in over five years. In the past three quarters, the values of our signed contracts were up 45%, 51% and now 66% compared to FY 2011. The pace of our contract growth has far exceeded the national housing data as we are gaining market share."

Outlook

For the fourth quarter, Toll Brothers estimates to deliver between 800 and 1,000 homes, at an average price between $570,000-$590,000. If realized, this would results in full year sales between $1.71-$1.84 billion. The company will formulate a full year outlook for 2013, in at the next earnings presentation.

"We believe the housing recovery is being driven by pent-up demand, very low interest rates and attractively priced homes. Customers who have postponed buying for a number of years are moving into the market. With an industry-wide shortage of inventory in many markets, we are enjoying some pricing power."

Valuation

Toll Brothers ended its third quarter with $877.4 million in cash and marketable securities. The company operates with roughly $1.9 billion in loans outstanding, for a net debt position of about $1.0 billion. For the first nine months of 2012, Toll Brothers reported revenues of $1.25 billion. The company net earned $75.7 million, or $0.45 per share. Tax benefits and other one-time items boosted the bottom line, as pre-tax income during the time period came in at $52.2 million.

At this rate the company is on track to generate annual revenues of $1.8 billion. The company could earn net income of $100 million. The market currently value Toll Brothers at $5.5 billion, roughly 3 times annual revenues. Lack of profitability results in very high price-earnings ratios exceeding 50. The valuation compares to a revenue multiple of 1.7 times for D.R. Horton (DHI), which trades at 8 times trailing annual earnings.

Currently, Toll Brothers does not pay a dividend.

Investment Thesis

Year to date, shares of Toll Brothers rose some 60%. Shares steadily rose from low twenties in the beginning of the year, towards the highest levels in over 5 years at the moment. Shares currently trade around the $33 mark.

Despite the real estate crisis, shares are up some 40% compared to levels in the summer of 2007. In the meantime, revenues fell from $3.1 billion in 2008 to $1.5 billion in 2010 and 2011. Revenues are expected to recover to $1.8 billion this year, and are expected to further rise into 2013. The company lost a lot of money during the first years of the crisis, but was profitable last year, and in 2012. Given the pricing power and growing backlog, it is fair to assume that profitability will improve further into 2013.

Toll Brother is positioned for growth. The company owns over 39,000 building lots. At its current delivery rates, this is sufficient to ensure supply over the next decade.

Shares more than doubled over the past year. While the company is well positioned for growth, I am concerned about the premium valuation levels after the recent run-up in shares. Unless the company gives a clear indication of strong profitability levels into 2013, I remain on the sidelines.

Source: Toll Brothers - Investors Are Pleased With Strong Results And Even Stronger Backlog