4 Reasons to Start Taking This Homebuilder Seriously

Toll Brothers' (NYSE: TOL  ) good fourth-quarter numbers have me thinking it is one of the few homebuilders worth a close look. Here are four reasons why Toll deserves investors' attention.

Improving metrics
Higher deliveries and orders are the two most crucial things homebuilders bank their hopes on. Fortunately for Toll, both these metrics improved in its fourth quarter.

Toll's homebuilding revenue rose 6% from the year-ago quarter, to $427.8 million, as home deliveries climbed 8% to 757 units. This comes as a breather after the 13% slump in its third-quarter revenues. Toll's net signed contracts rose a good 24%, to $390 million, with average prices rising 7% from last year.

Though Toll's net profit slipped to $15 million from $50.5 million a year ago, note that the company had $59.9 million worth of tax benefits in the fourth quarter last year, as compared to a tax expense of $0.2 million this time. Excluding these, Toll would have shown higher profits this time as compared to losses last year.

More good news
Toll's contract cancellation rate also improved to 7.9% from 8.8% a year ago. This is certainly impressive, considering how high the rate is for peers. Beazer Homes' (NYSE: BZH  ) cancellation rate was 34.2%, while D.R. Horton's (NYSE: DHI  ) cancellation rate stood at 29% in their respective fourth quarters. Even Hovnanian Enterprises (NYSE: HOV  ) had a high cancellation rate of 18% in its third quarter.

Another impressive point has been the rise in Toll's backlogs -- an important indicator of future revenues -- to $981.1 million from $852.1 million a year ago. Note how this contrasts with PulteGroup's (NYSE: PHM  ) 4% fall in its last-quarter backlogs.

Things definitely seem to be looking up for Toll.

Clean financials
Another thing I like about Toll is its relatively clean balance sheet as compared to most of its peers. The debt position of peers appears a little shaky when compared to Toll's. Here are a few examples.

PulteGroup's total debt-to-equity ratio stands at 175.9% while KB Home (NYSE: KBH  ) has a whopping total debt-to-equity ratio of 367.3%. Standard Pacific's (NYSE: SPF  ) total debt-to-equity ratio is 227.5%, and smaller player Beazer Homes' ratio is one of the highest at 750.5%.

Toll's total debt-to-equity ratio is relatively lower at 63.8%. The company also has good cash and marketable securities worth $1.14 billion.

Bold moves
A strong balance sheet leaves Toll in a comfortable position to expand its business. This year, Toll has increased its lot count to 37,500 lots from 34,900 last year. The most surprising development has been Toll's recent push into Seattle, by acquiring luxury homebuilder CamWest. This acquisition has added another 1,300 lots and around 15 more communities to Toll's kitty.

I find this move bold yet impressive, especially since it comes at a time when others are still shying away from making such investments. NVR is one of the few companies investing in land currently. But others, like KB Home and D.R. Horton, are busy rolling out solar-powered and energy-efficient homes. In such situations, Toll's investment in new markets is indeed praiseworthy.

Being a luxury homebuilder, Toll also has its eyes set on New York City, where it put up three new buildings for sale this year. Toll has now joined hands with Equity Residential to build a 40-story tower in Manhattan.

Toll's moves make more sense now, when the housing sector on the whole seems to be picking up.

Finally, reasons to cheer
Higher orders and healthier backlogs are the first signs that suggest the return of homebuyers to the market.

Recent positive housing data has added to the optimism. The National Association of Realtors reported a surprising rise in the sale of previously owned homes in the U.S. last month. New house sales rose 1.3% and 5.7% in October and September sequentially. To top that, Freddie Mac's U.S. Economic and Housing Market Outlook for October highlighted a gradual pickup in both new construction as well as rentals this year.

October also saw homebuilder stocks going wild when The National Association of Home Builders/Wells Fargo Housing Market Index posted its highest one-month gain in more than a year, signaling improving consumer confidence.

If buyers are coming back to the market, either because of rock-bottom mortgage rates or unbelievably low house prices, it is good news for Toll.

The Foolish bottom line
Improving operational performance, financial soundness, smart growth moves, and a pickup in the industry -- do you need any more reasons to start taking Toll seriously?

I suggest you add Toll to your stock watchlist using The Motley Fool's free, personalized stock-tracking service that keeps you updated on news and analysis on your favorite companies.

Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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