NEW YORK (TheStreet) -- Toll Brothers (TOL), the largest U.S. luxury homebuilder, didn't report breathtaking fiscal second-quarter results Wednesday, but that doesn't mean its shares lack value. While its 1% decline in quarterly revenue -- caused by fewer home sales -- was disappointing, the most recent releases of homebuilder data should have prepared investors for a tepid report.
However, considering what we know, the more than 2% decline Toll Brother experienced Wednesday, when it closed at $36.16, was an overreaction.
While the shares are up roughly 5% on the year, TOL trades at just 18 times earnings. Not only is that three points lower than the average for the S&P 500, it's also three points lower than the SPDR S&P Homebuilder ETF (XHB). The XHB includes competing homebuilders like TRI Pointe Homes (RYL), valued at a P/E of 25.
Why is the stock being discounted? Obviously, Wall Street didn't like last week's existing home sales report, which showed an unexpected sequential drop for April. The National Association of Realtors reported that April existing home sales fell to a seasonally adjusted annualized rate (SAAR) of 5.04 million, down from 5.21 million in March. Analysts -- on average -- projected a SAAR of 5.22 million for April.
It would have been tough for any homebuilder to overcome such tepid numbers. That housing market weakness showed in Toll Brothers' second-quarter sales, which came in at $852.6 million, down 1%, and falling short of estimates of average estimates by around $8.5 million.