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  • STOCKS HAVE A DOWN DAY By WSS Research Team 0 comments
    Feb 20, 2013 2:00 PM | about stocks: TOL

    By Carlos Guillen

    Stocks are having an overall down day as some rather mixed housing data and increasing producers' prices have all come together to shake investors' rather tepid enthusiasm, which has had the Dow Jones Industrial Average testing the 14,000 mark for all of this month.

    On the housing front, today we saw shares of Toll Brothers (NYSE:TOL) take an over 5 percent hit after the luxury-home builder reported fiscal first-quarter earnings and revenue that fell short of expectations, which resulted from year-over-year declines in the average prices of homes delivered and in the number of signed contracts.

    In addition, data posted earlier today had pros and cons, as housing starts declined to a worse than expected level, but building permits increased higher than forecasted. However, while housing starts were worse than expected, the prior month was revised higher, mitigating the January short fall; in other words, it kept the average run rate as expected. More importantly, building permits, which is considered a leading indicator, continued to slowly ramp higher; more on this below.

    Another report today showed prices paid to producers climbed for the first time in four months. According to the Department of Labor, the Producer Price Index (PPI) in January increased month-over-month by 0.2 percent; this compares with the Street's consensus estimate calling for a 0.3 percent rise. Excluding food and energy contributions to the price index, core PPI increased month-over-month by 0.2 percent, while economists' average forecast called for a 0.1 percent rise. While demand for commodities is starting to pick up, the global economy is still struggling to grow. Despite the increase in cost for producers, it is difficult to see these costs going higher as there is little evidence of rising demand world-wide, which we believe will leave the Federal Reserve enabled to maintain its course on their current policy.

    (click to enlarge)

    In all, while stocks are having an overall down day, it is encouraging to see that the Dow is holding above the infamous 14,000, but it's still too close for comfort.

    Starts Stutter, Toll's Troubles
    BY David Urani

    The big economic release of the day was January housing starts, which all the headlines are reporting as a shortfall but I'm not worried about it at all. Overall starts were down 8.5% month to month to 890k, yes, but what we're seeing here is a case of noise in the multifamily (5+units) data. Multifamily units had surged in December, causing a 15.7% increase in headline starts, and came back down in January which accounted for the dip. The better indicator to look at is single-family starts, which continued to increase to 613k from 608k and marched to a new 5 year high.

    Building permits also rose by 1.8% during the month to the highest level since June 2008. That indicates that the outlook for new construction remains positive. We would also note that we're in the dead of winter when few homes are built anyway so seasonal adjustments are partially to blame for some volatility in the data.

    In the end, the housing starts data does not worry me. Toll Brothers' (TOL) Q1 report, however, was a little worrisome. The company missed by $0.09 on the bottom line and revenues of $425 million fell short of the $493 million consensus (although still up 32% y/y). The company did see a decline in prices, but was affected by a mix shift which had previously benefitted from high-priced luxury apartments in Manhattan. A little bit more encouragingly, though, units in backlog were up 57% year over year, an acceleration from +54% in the previous quarter. In dollars, that backlog was up 66%. Consequentially, the outlook for 2013 sales looks good so far.

    Versus some of the other builders, Toll Brothers might not seem as strong given that much of the resurgence in the housing market of late has been in first-time buyers as opposed to TOL's move-up clientele (the average price per home in backlog is $665,000). We also have to wonder if the pending tax increases on the wealthy caused their potential buyers to become cautious during the quarter. That being said, Toll Brothers also seems to have relatively little competition in its market niche.

    The combination of TOL's report and a little bit of headline fright from the housing starts data (which we think is unwarranted) is weighing on housing stocks, with the Dow Jones US Home Construction Index (below) down 4.2%. It's brought out a lurking feeling from many that the sector has risen too far too fast.

    https://www.wstreet.com/user/register.asp?source=3

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