Toll Brothers, Inc. (TOL)

TMFJake (98.41) Submitted: 7/16/06 3:29 AM

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Wow, I hadn't noticed that the TOL PE had dropped so low. I'm going to wait a little while here (and kid myself that I CAN time the market), but I agree with you that you're picking up TOL on sale.

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hybridinvestor (36.51) Submitted: 12/16/06 10:52 PM

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Greetings sir,

I have been posting on several of the builders the following question. I keep seeing folks use the current "low p/e's" as a reason for undervaluation in this sector. I have always heard that for cyclicals which I think it is very reasonable to suggest that home builders are cyclicals you don't buy when the p/e is low because that means you are buying at "peak earnings". You buy when the p/e is sky high or on trough earnings. I currently don't see that even on some of the forward p/e's for most home builders. Any comments?

Overall, I am very long-term bullish on housing in the US meaning beyond the next say 2-4 years but in the near-term I think they are in for more surprises to the downside especially after recent recoveries of 30-50%+ on most builders. Folks are pricing them like a turnaround in terms of them being able to beat the record volumes at the record high margins they were able to have over the perfect environment of the last 5 years. I'm not sure I am ready to say that builders will beat those record volumes/margins in the next couple of years to justify these strong rebounds.

cheers.

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TMFEldrehad (99.99) Submitted: 1/24/07 6:13 PM

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I'm certainly no expert on cyclicals, and even less of an expert on trying to time purchases in cyclicals. That said, while I think I understand your comment, I think it only paints half of the picture.

Certainly a low P/E can, indeed, come from high or 'peak' earnings. That in and of itself, in my view, doesn't tell us much about the valuation of the company. Sure, earnings could be at a peak and headed for a decline (which is what your comment suggests, and what the market seems to think regarding homebuilders), but the central question in my view regarding the homebuilders isn't whether or not earnings will decline - the central question is by how much, how quickly, and for how long they'll decline.

At the time I made this pick and wrote my original pitch, I believed the P/E to be so low that the market was overestimating both the depth and breadth of the decline by a good margin, making the shares attractively priced.

There may well be more pain ahead for this sector, and while my pick here is scoring nicely so far, it is still far too early to tell whether or not I was right. Again, though, I think the central valuation question isn't whether or not earnings for cyclicals (or any other company for that matter) are at a relative trough or peak, but rather what the market's expectations are for future earnings, and whether or not the market has priced that stream of future earnings appropriately.

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jester112358 (94.54) Submitted: 8/03/07 2:48 AM

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Yes, we know the price/share, but the books on many of these companies may contain accounting tricks to hide bad inventory which will eventually have to be charged against future sales. So, cash flow is a serious problem (i.e. some of these companies may declare bankrupcy before the new housing cycle begins and cash starts flowing.) I still believe this will happen with Beazer, despite their protests (they are being investigated by the SEC for accounting tricks for example) Since shareholders have the last claim on company resources there's a huge risk factor in any of the housing and house lending stocks. In other words, this sector may still be overpriced.

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