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Toll Brothers' Impressive Quarterly Results Mask an Overvalued Foundation

Further, based on Toll's price to book ratio, shares appear fairly valued compared to the industry, its competitors and its historical averages. Not to mention the fact that Toll Brothers is one of the few housing stocks that do not currently pay a dividend.

Lastly, Toll's balance sheet will be hampered because of the financing involved in the purchase of Shapell Homes. This includes a $485 million, five-year, senior unsecured floating rate bank term loan, $600 million of five- and 10-year senior unsecured debt, and $230 million of common stock.

Despite the capital intensive nature of homebuilders, increasing overall debt burden while diluting existing shareholders will likely hamstring shares of TOL at a time when overall demand is leveling off.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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