Sure, times are tougher in the homebuilding segment, but are they really this bad? I certainly wasn't a big fan of luxury homebuilder Toll Brothers (NYSE: TOL) back in December, and the subsequent 25% or so drop in the stock certainly validated that skepticism. But I'm one of those weird folks who's attracted to capitulation, so maybe it's time to take another look here.
Very little was fabulous about this quarter's report. Revenue was up 17%, which certainly isn't bad, but margins slipped, and operating income growth was only on the order of 2%. While the increase in the cost of goods sold doesn't really bother or surprise me (concrete, steel, and copper piping aren't exactly cheap these days), I'm not quite sure what to make of the rise in SG&A spending.
Other numbers weren't exactly sunny, either. The value of the company's backlog rose 3%, though most of that was from pricing (as opposed to unit growth). And the order book was kinda scary, as signed contracts dropped 29% from the year-ago period.
It might be stating the obvious, but management attributed declining prices and lesser order activity partly to excess inventory in the current market. That said, executives did express optimism that the current environment was more of a dip than the beginning of a prolonged slide.
Here's the thing, though. Why aren't company insiders scooping up shares? Why hasn't there been any big merger talk in the space? Why isn't anybody telling the market to just stuff it and launching an LBO for their companies? Seems to me those are often the harbingers of truly underappreciated sectors.
I don't think there have been any really strong homebuilder stocks, but while Toll Brothers has underperformed peers like WCI Communities (NYSE: WCI) and Orleans Homebuilders (NYSE: OHB), it hasn't gotten smacked quite as bad as Hovnanian (NYSE: HOV).
What's more, the current stock price would seem to discount 15% annual cash flow shrinkage for the next five years, with just GDP-level growth forevermore after that. That strikes me as being quite possibly too pessimistic. Suffice it to say, then, I'm going to be doing a little more digging to see whether this really is a chance to buy into panic. Remember, there's a time for prudent skepticism and a time for blatant opportunism.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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