I can just hear housing optimists singing this rendition of Handel's "Messiah" after Toll Brothers (NYSE: TOL) CEO Bob Toll's remarks in recent weeks. Luxury homebuyers are purportedly easing back into the market. With more new deposits, fewer cancellations, and cutbacks on incentives and price reductions, is it possible we've already hit bottom? Mr. Toll certainly thinks we have.
Toll Brothers' fiscal third-quarter results weren't exactly pretty. Non-cash writedowns and big deferred tax asset valuation allowances did some damage, but the company should get some of it back in future years.
Toll Brothers lost $472.3 million, or $2.93 per share, in its third quarter, versus analyst estimates of a loss of $1.79. That compares with a loss of $29.3 million, or $0.18 per share, in the same period last year. Revenues were down 42% to $461.1 million, and home deliveries fell 36% to 792 units.
Finally
Still, the report supported Mr. Toll's preliminary reports two weeks ago of higher year-over-year order volume. The release gives a glimmer of hope for a market niche that has seen its share of suffering. If true, the allegations that home buying is on its way back could mean better results for builders like the ones mentioned below.
| Company | Avg. Home Price (MRQ) | Profit Margin (TTM) |
|---|---|---|
| Toll Brothers | $535,000 | (12.2%) |
| D.R. Horton (NYSE: DHI) | $211,000 | (25.2%) |
| KB Home (NYSE: KBH) | $216,000 | (25.7%) |
| Pulte Homes (NYSE: PHM) | $261,000 | (29.6%) |
| Lennar (NYSE: LEN) | $251,000 | (30.5%) |
Sources: Individual company press releases, Yahoo! Finance. MRQ = most recent quarter. TTM = trailing 12 months.
But before you break out the choir robes and caviar, remember that the broader economy still has a few hurdles to jump.
Stormy waters
Toll Brothers' status as a luxury builder differentiates it from many of its competitors. Unfortunately, that luxury focus may work against Toll Brothers unless the recovery is particularly strong.
According to statistics from the New York Fed, credit conditions, especially with regard to mortgage delinquencies, foreclosures, and their impacts on communities, are still far from optimal throughout much of the nation. Even though Toll Brothers has available financing and a knack for exploiting distressed asset buying opportunities, its shares are already up 70% from their lows. Toll Brothers also presents a potentially expensive risk to investors if these signs of recovery turn out to be a false alarm.
As I see it, the real takeaway from Toll Brothers' quarter is that some key industry participants are seeing tangible signs of a turnaround. If those trends continue, it could mean that we've finally seen the worst of the recession. Yet even if housing does rebound, the boom that drove so much demand for luxury homes may not return anytime soon.
Is it really over? What's your strategy for taking advantage of the end of the housing crisis? Share your opinions in the comments section below.
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