Best Buy looked shaky early today after reporting earnings this morning, but managed to trade higher today on 3(x) average volume despite the weak ending to the trading day.
Toll Brothers (TOL) the high-end homebuilder whose average new home sells for between $500k – $800k, depending on the region, is expected to report fiscal q2 results before the bell Wednesday, with analyst consensus looking for $0.04 on $379 ml in revenues for expected decline in revenue of 46%, although earnings are expected to be up slightly.
Today’s April existing home sales were up, and slightly better than expected as average prices jumped 10%, which was distorted by a dearth of foreclosed properties in April.
The point is that – while the housing data is getting better – the rate of improvement is slow and uneven as bank credit remains tight and the housing market has returned to a more rational and orderly pace.
The one interesting aspect to Toll Brothers, is that over the last three years, despite the weakness in the lower end of new homes, TOL’s high-end niche has actually held up pretty well.
TOL is thought to have the safest balance sheet in the business and is one of the few low investment-grade, higher speculative grade ratings in the sector. BBB-/BB+ is about where TOL is rated from a credit perspective, which is a competitive advantage in this environment, since most of TOL’s competitors are pure drek from a credit rating ranking.
TOL has had a huge run off the October lows, from $14 to today’s $26. We sold half our position yesterday in the stock at a nice gain, since the sector needs a pullback. We still have our full Lennar (LEN) position. The current p/e looks lofty at 70(x) 2012’s expected $0.78 per share. Estimates have been stable since last fall, but we do need to see those annual eps estimates start to creep higher.
2011’s new home starts were the lowest since the early 1960’s or the Kennedy Administration, and the homebuilders financials reflect this. Negative cash flow and continued pressure on margins needs to translate into lower SG&A and a model that will leverage growth when it does happen.
Morningstar has a fair value estimate on TOL of $23, so the stock is trading at a premium to that price. We think improvement will come, but the rate of improvement is the big question.
Long TOL, LEN