Toll Brothers, Inc. (TOL)

hybridinvestor (90.70) Submitted: 12/19/06 5:38 PM

Recs: 0 | Rec This

My 2 cents would be to focus on the right bottom here. That is, ignore the stock prices of these companies and focus on when one has a reasonable feel about the evidence for a "bottom in their fundamentals". I see too much evidence to the contrary to say I think they have bottomed fundamentally. I don't care about the price and won't until I think it is safe to wade back into builders when they can sustain growth again.

I follow the incentives of some of these companies and they are even now significantly higher than they were even a couple weeks ago or last month. That means more margin pressure at the same time I am convinced they will not return to the peak volumes of homes sold about a year or so ago. So, a double whammy. Decreasing volumes and margins.

Current building starts and permit figures that were just released are negative toward the builders. Why? IMHO it is a negative actually that starts were up. Ok, before you think I am crazy here is my rationale. They need starts to keep decreasing before inventory levels will start to work down. So, increasing starts means less pressure on inventories to decrease because of new inventory coming on the market and thus inventories don't get worked down. That feeds higher incentives to move existing and new inventory because no one wants to report significantly lower volumes that propelled their stock prices to the high's they hit with very strong margins toward the peak. Classic excess capacity or supply situation.

Also, much lower permit numbers hint toward the future more meaning the builders still expect to see decreasing volumes going forward for a number of quarters likely. So, decreasing volumes is good to work away inventory but margins suffer in the near-term.

So wrapping up, I would suggest folks wait for evidence of a "bottom in fundamentals" and ignore stock prices here even considering the markets are forward looking. You'll get plenty of chances to buy these guys on the cheap when their p/e's are sky high because their margins/earns/revs are all taking hits. To me, I think a bottom in fundamentals basically points to some level where inventory levels get back to more normal levels or say about half or more from where they are at now. I am hearing estimates of 7 months of inventory so I might start getting interested when I start seeing only 3-4 months inventory on hand and I expect leading up to that overall housing starts should have fallen likely 40-50% or more.

Report this Post Reply

TallCoz (54.94) Submitted: 1/03/07 10:54 PM

Recs: 0 | Rec This

I'm also looking into regional variations. I live in the Baltimore/DC metro area - we're going to be cramped for housing here unless the federal government folds. The bubble has had air let out of it - house prices have actually fallen locally - but people are still being relocated into this region. Toll Brothers has cut back on new developments, but they have the land already optioned or bought for the start of the next cycle. Even with the increasing backlash against development in the region, they already have enough permits in hand to ride out one election cycle.

Thanks for the reply.

Report this Post Reply