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Toll Brothers' Constructive Quarter


Cautious optimism for high-end homebuilder.

On Wednesday, high-end homebuilder Toll Brothers (TOL) disseminated preliminary third-quarter revenue and backlog numbers; final results are due out September 4th. While nothing in the release suggested that a champagne toast was in order, I do think that there were some bright spots worth mentioning.

For the period ended July 31, the Pennsylvania-based company reported homebuilding revenue of $796.5 million, a 34% decline in dollars when compared to the comparable period last year. However, the number is north of the $717.6 million analysts had been expecting. At the same time, its backlog declined 52%, coming in at about $1.75 billion.

CEO Robert Toll said that the company "[believes] there is growing pent-up demand from those who have postponed buying during the past 3 years. For example, when we run promotions and work the phones for a market, our rate of deposits improves significantly." The release indicated that the company had about $1.5 billion in cash at quarter's end; its land position now stands at about 48,500 lots, down from more than 91,000 in mid-2006.

Though the revenue and backlog numbers aren't great, the company's ability to whittle down its lot holdings and maintain a decent pile of cash is encouraging. Toll could, for example, use that cash to to purchase land on the cheap or buy back stock - or hold on to it for some other opportunity down the road.

And although Mr. Toll has a reputation for being a bit of a cheerleader, I'm encouraged by his optimism. It leads me to believe that perhaps the worst is over.

Because homebuilding revenue seems to have come in north of expectations, I wonder if Toll's quarterly EPS will end up exceeding the consensus estimate. That, of course, remains to be seen - but it could prove to be a catalyst for the shares.

The company also said that cancellations totaled 195 in the period - good news, because it's substantially lower than those posted over the past few quarters. I realize that's still a lot of cancellations (no need to send in those angry emails), but I do think it represents an improvement.

On the other hand, there's no guarantee that higher end real estate will perk up materially anytime soon. Furthermore, the competitive environment – discounting, among other things -- could weigh on the company in the near future.

Toll Brothers closed at $20.84, up $0.20 or 0.97%.

No positions in stocks mentioned.

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