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Bear of the Day: Toll Brothers (TOL)

Tracey Ryniec

Toll Brothers, Inc. (TOL) is dealing with big uncertainty in the home buying market. This Zacks Rank #5 (Strong Sell) was only recently able to give guidance for the quarter, and not the year.

Toll Brothers builds luxury homes in the United States. It serves move-up, empty-nester, active-adult and second home buyers as well as renters in urban and suburban markets.

It operates in 22 states and the District of Columbia.

Beat Again in the Fiscal Fourth Quarter

On Feb 26, Toll Brothers reported its first quarter fiscal 2019 results and beat the Zacks Consensus by 13 cents. Earnings were $0.76 versus the consensus of $0.63.

It was the fifth beat in a row.

Home sales revenue were up 12% to $1.32 billion as home building deliveries jumped 8% to 1,530.

Net signed contracts fell 31% to $1.16 billion with contract units down 24% to 1,379.

It blamed the fall in contracts on three things: difficult year-over-year comparison, a lack of current inventory in certain locations and the industry-wide slowdown that began in the second half of 2018.

Won't Guide for the Full Year

It did see improving demand trends during the month of February, but it wasn't enough to convince the company that the worst was over.

It would only offer guidance for the second quarter, and not the entire fiscal year.

It expects deliveries between 1,650 and 1,850 units with an average price of between $860,000 and $890,000.

Gross margins are expected at about 23.1%, that's up from 22.5% in the year ago quarter.

As a reminder that this isn't anything like the 2008 slowdown and that the home builders are much better managed, Toll's CFO, Martin Connor, stated, “Our balance sheet remains solid. We ended our first quarter with total liquidity of $1.9 billion, including over $800 million of cash and cash equivalents and $1.12 billion available under our revolving bank credit facility. We finished the quarter with a book value per share of approximately $33."

Estimates Slashed

The analysts didn't like what they heard so they erred on the side of caution and cut full year estimates.

6 estimates have been cut in the last month for fiscal 2019, pushing the Zacks Consensus down to $4.48 from $4.70 during that time. That's an earnings decline of 4.8% as it made $4.71 last year.

6 estimates have also been cut on 2020 at the same time. The Zacks Consensus Estimate has fallen to $4.52 from $4.88 in the last 30 days.

Is the Housing Trade Over?

Toll Brothers shares took a beating in 2018 as investors fled the homebuilder stocks. But they rebounded off the recent lows in 2019 and are now up 9.3% year-to-date.



But with even Toll Brothers themselves reluctant to give full year guidance, investors seem reluctant to jump in here.

They are still incredibly cheap. Toll has a forward P/E of just 8.

But ALL of the homebuilders are pretty attractively valued, compared to the S&P 500.

Lennar (LEN) is trading with a forward P/E of 7.9. PulteGroup (PHM) is at 8.4.

D.R. Horton (DHI) is at 10.4x while NVR, Inc. (NVR) is the most expensive, at 15.4x.

Out of this group, only Toll is a Rank #5 (Strong Sell) but PulteGroup is a Rank #4 (Sell) while the others are #3 (Holds).

If you're looking to invest in the home builders right now, there's not a lot of places to hide.

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