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Disingenuous Hubris


Is this guy for real?


In the last Toll Brothers (TOL) conference call, Mr. Toll - of "we will crush the shorts" fame - raised his level of hubris to new heights, so high in fact, that it came back to bite him in the arse.

The call is replete of instances where Mr. Toll goes out of his way to flaunt his "I-can't-be-bothered-with-that-stuff-because-I-am-too-important" lack of knowledge of the details of his business. With a tone of imperial benevolence, he then delegates to "his people" responses to analysts' questions.

If that is the way Mr. Toll wants to run HIS company, more power to him. He has accumulated a bank account size that allows him to do virtually anything he wants, morality and good-taste of such conduct aside. However, a line needs to be drawn when share price and personal aggrandizement spill over into disingenuous assertions.

On the conference call Mr. Toll quoted Prof. Susan Wachter of Wharton for the proposition that homes in Europe still cost twice as much as in the U.S., and he stated that the trend in the U.S. is to catch-up to the European valuations. Unfortunately for Mr. Toll, he was embarrassed by A.G. Edwards' Gregory Gieber, who noted that Mr. Toll (conveniently?) overlooked Prof. Wachter's warning of a growing "housing bubble", a "detail" that would tend to undercut Mr. Toll's proffer. (See here also.)

And since we are speaking of my two favorite topics - real estate and Europe - Mr. Toll might do well to get off his throne and spend some of his recent $1 billion dollars in stock sales on a trip to Europe. There he might discover the following:

  • A good chunk of Europe is occupied by very large rocks called the Alps. Unlike the imaginary zoning problems that are constraining the builders to putting up "only" one new home for every 1% of existing households per year, the Alps truly are not amenable to re-zoning.
  • European cultures are sedentary, to the point that, in Italy at least, almost one fourth of un-married adults above the age of 30 still live with their parents. If housing cannot be found within a few miles of where one's family lives, people are very reluctant to move and will pay-up for what's available, if they can afford it.
  • Homes in Europe are still built with bricks and mortar, a MUCH more expensive construction process;
  • The overwhelming majority of construction labor in Europe is unionized, and is MUCH MUCH more expensive than in the U.S.; and last
  • Homes in Europe are more costly on a per square foot basis because most are multi-family dwelling, which inherently tend to be smaller and relatively more expensive.

So unless Mr. Toll a) moves back home with his mom; b) starts building homes that last a few centuries; c) pays union wages to the "little people" and "thank you notes" to the union leadership; d) convinces Americans to abandon their green yards in favor of high rises; and e) causes a 12,000 ft. mountain range to emerge between Texas and Illinois, the U.S. is very unlikely to trend toward Europe's valuations. And even if all of the above were to occur, the builder's profit margins may have little to show for it.

Until then, Mr. Toll might want to stick to his sob routines of how "terribly difficult" it is to re-zone wasteland in the Nevada desert, and how skilled Toll has become at that. Or at least he may want to spend a bit more time sweating the details of what he tries to blow up his shareholders' tails.

No positions in stocks mentioned.
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