Five Reasons Not to Build Your Portfolio with Toll
Company has missed estimates three quarters straight.
That said, today I'd like to drill down into Toll Brothers (TOL) in more detail because the upper-crust home-builder is due out with its third-quarter earnings this Thursday.
Here are some of thoughts:
1. There's no argument that Toll Brothers is a quality builder with a quality name, and actually, a quality management team. But let's face facts: How many people are talking about dropping mid-6 digits on a home these days and are ready to take on a jumbo mortgage? Toll, because it's in the higher-end of the home-building spectrum, needs the economy to do better in order to drag in the big dough.
2. It seems like investors are jumping on the bandwagon in hopes of a pretty robust turnaround in the sector and the economy. But what happens if we get one of those W-shaped recoveries, or if interest rates jack up, or another economic shoe drops sometime in the near to intermediate future? Fact is, I see no reason for this stock to trade north of $20 with the losses it's expected to offer up. By the way, it's slightly peculiar that insiders have been mum, isn't it?
3. Although the company pointed out earlier in the month that its cancellation rate was pretty low in the third quarter (4.9%), the following comment in that same release shows that not all is peaches and cream: "In FY 2009's third-quarter home building deliveries and revenues of 792 units, or approximately $461.3 million, declined by 36% and 42%, respectively, compared to FY 2008's third-quarter home building deliveries and revenues of 1,244 units, or $796.7 million."
4. The data shows that the last 3 quarters straight, the company has missed estimates. Maybe that will turn around this quarter, but I'm not holding my breath. Note that the current estimate for the period is a loss of $1.26. I'm not expecting its top management to paint a super sexy picture of what the near-term future may hold.
5. I'm a tad more optimistic when it comes to Toll and the building space than I was a few months/quarters back. However, the situation could be a smidge more interesting if the stock were in the mid teens.
Hey, have a great day!
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