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Toll Brothers Inc. Message Board

  • ebarsamian2003 ebarsamian2003 Jul 27, 2005 6:56 AM Flag

    The Story of TOL by $$$MR. MARKET$$$-4

    The future continues to look bright for Toll Brothers, with no evidence of a slowdown in sight. The company's second-quarter contracts and backlog of $5.87 billion were the highest for any quarter in its history. Through its first two quarters, Toll Brothers has signed accounts on 5,354 homes. At that pace, it should easily top its previous forecast of 8,050 to 8,400 homes for the year.

    Like $$$MR. MARKET$$$ has said before, if yields on the 10-year bond rise, they will go up because of economic strength � strength that creates more jobs. That will fuel more demand for housing, offsetting any negative impact from higher rates.

    Next, interest rates are so low, it�s not clear they will go up enough to kill off the housing market. Even if yields on the 10-year bond go up 1.5 to two percentage points to hit 5.5% to 6% over the next year or more, that would take the 30-year mortgage rates -- recently around 5.5% -- up to about 7.5%. If history is any guide, that�s not enough to cool off the housing market. The last three housing market slowdowns -- in 1995, 1997 and 2000 -- didn�t happen until mortgage rates moved into the 8.4% to 9.4% range. Joel Rassman, the finance chief at Toll Brothers says �There is so much demand, if we stay in the 6% to 7% plus range, housing will continue to boom. � Robert Toll confirms, �"We had a field day in 1995 when mortgage rates went up to 9.1%," he said.� Toll Bros. also kept growing in 1997 and 2000, when interest rates were at 8.1% and 8.75%, respectively.

    TOL noted that it�s buying more land now than a year ago. Increased land buying is occurring in many areas, including NE (NY, CT, NJ); West (AZ, LV, lesser degree CA); FL (E & W coasts). It�s great that management is using cash flow to fuel growth. In most cases, the money is being made on the land appreciation. Before TOL drives their first nail, they�ve already made money on a house. On the supply side, there are land shortages in key metropolitan areas and greater obstacles to using land for housing. Meanwhile, demand will get a boost from new immigrants, baby boomers buying second homes and so-called echo boomers buying first homes.

    TOL�s debt-to-capital at quarter end was 42.1%, down from the 2Q04 level of 49.3%. TOL�s return on capital continues to expand, at 17.7% from 11.9% in 2Q04, driven by increased asset efficiency, profitability and leverage. TOL�s 68,000 lots controlled represents approximately a 7-8 year supply of lots based on next twelve month projected closings.

    Although the company does not provide specific earnings per share guidance, it did raise its fiscal 2005 outlook to approximately 70% net income growth versus its prior guidance of at least 60% growth. Additionally, despite the higher base earnings in 2005, anagement believes it can still achieve earnings growth of approximately 20% in fiscal 2006.

    With valuations improving for nearly all builders due to evidence of ongoing strength in operating performance and greater visibility into 2006. TOL�s stock price would hit $60 based on about a 13.3X P/E multiple applied to our First Call 05 EPS forecasts, which is well past my sell price.

    My earnings estimate, which is based on net income growth of 90%, incorporates 50% homebuilding revenue growth and 430 basis points of operating margin expansion to 22.8%. $$$MR. MARKET$$$ sees earnings at $5/share, which would mean the stock will probably go over 67.

    There�s not a lot more I can say about this stock. If you think �bubble� is not going to burst, there is absolutely no reason to NOT own TOL�s stock. If you are fearful of the "bubble", then this is not a stock for you.

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