Dec. 3 was the proverbial “good news/bad news” day for Toll Brothers (Stock Quote: TOL). On that day, the home construction giant released its fiscal fourth-quarter numbers. What those numbers show is that the home construction market is hurting and will continue to hurt, but maybe there’s light at the end of the tunnel.
For the particulars, Toll Brothers lost $111.4 million in the fiscal fourth quarter of 2009. Total revenues declined to $1.76 billion from $3.15 billion. It also reported a 42% boost in new home sales and only a 7% decline in housing cancellations. The company assigns the blame for the loss on write-downs on the value of the land it owns and expenses due to managing staff reductions. Company officials also point to a slowing market as the holiday season kicks into higher gear.
"The choppiness in demand that began after Labor Day, following a stronger period from late March through late August, has continued," Robert Toll, chief executive officer, said in a statement released by Toll Brothers. "This is consistent with recent weaker economic news. Since the holiday season is not typically the busiest time to be purchasing or selling homes, we suspect the housing market may be following seasonal buying patterns."
Holidays or not, the trouble for Toll Brothers is that it’s operating in a chaotic housing environment. The numbers show that more and more Americans are late on their mortgage payments, and more are consequently facing foreclosure. But sales of new homes were up in October, and new homes are what Toll Brothers are all about.
But are those new home sales sustainable? There’s little question that the extension of the $8,500 new home purchase tax credit has propped up the market — and that extension is good through April 2010. Better yet for Toll Brothers, which makes its bread-and-butter on pricey “trade-ups” from people who already own homes but are looking to move up, Congress also approved a $6,500 tax credit for existing homeowners.
But the tax credits can’t go on forever. And when they eventually expire, Toll — and other homebuilders — will likely find themselves right back in the line of fire, profits-wise.
Another key issue is pricing. At a time when U.S. homeowners are begging for value, with many trading down to small, less expensive houses, Toll Brothers says the average price for one of its homes rose from $495,000 in the fourth quarter of 2008 to $535,000 in the fourth quarter of 2009. That’s a train running on the opposite track of most U.S. homeowner’s housing values, which will decline by 38% from 2006 through 2010, according to Standard & Poor's/Case-Shiller U.S. National Home Price Index.
Standard & Poor’s/Case Shiller reports that rising foreclosures (after a brief lull in mid-2009) will drive home prices down into 2010. It estimates that 7.5 million foreclosures will have transpired between 2006 and 2011.
Those numbers would seem to work against Toll Brothers specifically, and the housing market in general. Stock market investors certainly saw it that way, driving the price of Toll Brother’s stock down 6% immediately (to $18 per share) after the company announced its fourth-quarter earnings.
But Toll Brothers is keeping a stiff upper lip. Where others see a decline in consumer confidence and a combustible housing market, Toll Brothers sees the opposite. Says Toll's CEO, in a statement released by the company: "We have definitely progressed from one year ago. The shock to the financial system in mid-September 2008 that shut down the capital markets appears to be mostly behind us. The improvement in consumer confidence over the past year, the increasing stabilization of home prices, the decline in unsold home inventories and the reduction in buyer cancellation rates suggest that the new home market should be improving; we sense that it is, though slowly and through choppy waters."
To its credit, Toll Brothers still has a solid balance sheet, plenty of cash on hand and should be one of the survivors of a thinned-out U.S. homebuilding industry.
But that’s the good news. If Americans increasingly turn to cheaper homes and (heaven forbid) rentals over the kinds of pricey homes Toll Brothers sells, it will be a rough road ahead.
Not only for Toll brothers, but for the entire U.S. housing market.
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