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Four Reasons to 'Punt' Toll Brothers

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Better to wait a couple quarters for the high-end home builders.

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It's evident that land is a finite resource both here in the US and, now that I think about it, all around this big, green marble we call Earth. For this reason, it seems logical that demand for land and homes will be strong in future decades and for generations to come, and that prices should similarly rise.

Taking that thought a bit further, I surmise that companies waist-deep in the construction business -- from material suppliers to the home builders themselves -- could get a really nice goose in time.

But at the same time, the near term seems like it's going to be bumpy, and this economic recovery is so fragile that I'm admittedly afraid to belly up to some of the larger players in this space, specifically to those that cater to the higher end of the spectrum like Toll Brothers (TOL).

Actually, while I'm at it, here are some of my thoughts on that company as we near the release of its final fourth-quarter results.

1. Toll Brothers released preliminary quarterly data back on November 10 and there was some upbeat news that caught my eye.

For one, in the release, Chief Financial Officer Joel Rassman said:

We continue to focus on maintaining significant liquidity. We ended FY 2009 with $1.81 billion of cash and $101 million of marketable treasury securities, compared to $1.66 billion of cash at FY 2009's third quarter-end and $1.63 billion at FYE 2008. At FYE 2009, we had $1.38 billion available under our $1.89 billion 30-bank credit facility, which matures in March 2011.


In short, that's a decent pile of dough that should give the company some flexibility if the housing market continues to merely putter along. But unfortunately, flash in its pocket isn't enough to get me into this stock.

2. Toll Brothers is known for building high-quality, higher-end homes that are in the $500,000 range, and when you toss in the options these guys offer, it's often higher than that. But that's not where I think the sweet spot is going to be over the next few quarters or maybe even years.

There isn't exactly a super rush to apply for large mortgages or to get into the bigger homes right now, and if rates start to crank up, interest in what we affectionately call McMansions could seriously diminish -- and by extension, the company struggles.

Also, the current unemployment situation and the jobless outlook doesn't leave me with the impression that upper-middle class folk are going to be dropping huge coin on cars, boats, motor homes, good old fashioned houses, or other sizable items particularly soon, which is another macro reason I'm bearish.

3. As far as the fourth quarter is concerned, the estimate I'm seeing right now is for a $0.40 loss. Will it hit that number? You got me. But any way you slice it, I'm not expecting anything too surprising given the preliminary data, and I seriously doubt there are going to be a lot of high fives traded that day.

4. I'm not too impressed with the news, at least some of the stuff that I've seen, coming from some of the other big players in this space either. Take DR Horton (DHI). It's coming off a less-than-stellar fourth quarter.

So what am I thinking when it comes to the home builders? The word "punt" comes to my mind. By that I mean I like them in the long run, but still don't feel the love, or at least enough love to want to get in neck deep. So my plan is to just wait a few quarters and see how things play out.

Hey, have a great day!
No positions in stocks mentioned.

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