may be setting itself up as the homebuilder least likely to disappoint investors.
While future housing fundamentals remain dicey for the luxury-home builder because of growing inventories of homes and problems in the high-end mortgage-loan market, Toll Brothers appears to be doing all the right things to survive the downturn.
Toll shares were climbing 4% Wednesday after the company posted better-than expected third-quarter results. While net income fell 85% year over year, Toll did manage to post a profit, besting Wall Street's expectation for a loss.
The Horsham, Pa., homebuilder made $26 million, or 16 cents a share, for the quarter ended July 31, down from the year-ago $175 million, or $1.07 a share. The latest quarter included $147 million worth of pretax writedowns.
Results were helped by a one-time $15 million pretax gain from the sale of the company's home-security monitoring subsidiary. However, even without these gains, Toll's earnings would be roughly 7 cents a share, according to estimates from
Analysts expected a loss of 2 cents a share, before items, according to Thomson Financial.
One of the reasons Toll's results look better than other builders' is that the company has recorded less in land impairment charges. That's because Toll generally builds on an older stock of land than its peers do. Since the company paid much lower prices for that land, its charges aren't as heavy to write down the value.
Including the land writedowns in the quarter, Toll posted a gross margin of 11%, down from 27% a year ago. While the drop was steep, Toll's margins look better than other builders' -- and this trend could continue in coming quarters.
Other builders still have another few quarters of very poor margins because of the likelihood of more land writedowns, since these builders are constructing homes are newer land.
Of course, at some point, Toll's margins will start to look worse than its peers', since its land writedowns will likely be spread further over time (smaller charges per quarter on a longer basis).
Toll also has one of the lowest debt-to-equity ratios of its peers, at 0.62.
have similar ratios, but these two builders will likely record larger impairments in coming quarters, meaning their book value is more at jeopardy than Toll's.
Fears of a credit squeeze, meanwhile, have pummeled highly leveraged builders such as
Year to date, Toll's stock is down about 31%, compared with declines of more than 60% at WCI, Hovnanian and Beazer. Toll's stock has also outperformed every major U.S. homebuilder this year, with the exception of
, which is down about 20%, and
, down about 10%.
Although Toll didn't provide a cash flow statement in its earnings release, the balance sheet shows that inventories and receivables went down. That means the company is doing a good job of creating cash in a tough housing market.
Total cash on the balance sheet rose to $772 million at the end of July, compared with $553 million at the end of April.
Still, while Toll may be the best of a battered sector, that's not to say it doesn't have its own fair share of troubles.
The problems in the mortgage market may have yet to play out in full for the company. Bank of America analyst Daniel Oppenheim, who
cut the builder to a sell Tuesday, said he thinks Toll is set to experience tough sales in the second half of this year because of the lack of liquidity in the mortgage market.
About 43% of Toll's sales come from Alt-A loans, which are given to buyers with little credit history or poor documentation. Many banks have now shied away from creating such loans, because they cannot resell the mortgages in the secondary market.
But while Toll's prospects definitely are not stellar, its margins and balance sheet suggest that the stock will continue to outperform many other builders.
Toll shares were up 89 cents, or 4.2%, to $21.89 in recent trading.