The bell's about ready to sound on the
The stock will be in the spotlight these next couple of days because the company is due to post third-quarter earnings Tuesday morning. Some worries about the luxury homebuilder dissipated earlier this month, when the Huntingdon Valley, Pa., company preannounced a stronger-than-expected quarter. But with the economy softening, it's getting harder and harder to see where all the growth is going to come from.
Over the last couple of years Toll Brothers put in a solid rally as low interest rates and the booming stock market spurred housing prices ever higher. The problem is that even with the economy looking sluggish this summer, rates don't seem likely to go any lower anytime soon. That and rising unemployment will put a cap on the number of high-end houses demanded by consumers. Brokers I've talked to say bidding is already down over the last year.
Even if the economy does start to pick up, it's entirely possible the
will boost rates to make sure we don't end up with an inflation problem. And if rates drift up over the next year, jumbo mortgages -- the big borrowings that buyers of $500,000 houses typically take out -- could hit 8%! That could mean a big pickup in monthly payments for house buyers, further pressuring demand.
Plus, the numbers in the company's third-quarter earnings forecast aren't as good as they look at first glance. Sure, contracts are up and the backlog's at a record high. But closings fell 3% from a year ago even as selling communities, or developments in which units are available for sale, jumped 7%.
That means the company, which depends on a quick turnaround to keep cash flowing, is left with more costly inventory on its hands. Toll Brothers also has a big land inventory that could become a burden if housing prices stagnate.
Of course, bulls would point out that the company has grown for a solid decade and that revenue continues to rise. Moreover, they say, the stock is trading at just 9 times earnings estimates and 1.8 times book value.
But what the Toll Brothers fans -- and there are plenty of them -- don't seem to grasp is that 9 times earnings is actually on the expensive side for this stock, going by its historical multiples.
Bottom line: Toll Brothers is simply not worth the risk.
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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Curtis welcomes your