This Homebuilder's Got What It Takes

Toll Brothers' (NYSE: TOL  ) first-quarter numbers aren't ones to swoon over. It posted a loss of $2.8 million, home deliveries slipped 1%, and revenue fell 4%. The homebuilder, nevertheless, is one of the few that look good enough to be on your radar. Toll's financials are decent, its investments are impressive, and the housing market is improving by the day.

Better off than the rest
First things first: Toll seems to be in a much better position than its peers because of its relatively cleaner financials. Take a look.

PulteGroup's (NYSE: PHM  ) total debt-to-equity ratio stands at 161.8%, while Lennar's (NYSE: LEN  ) is at 137.4%. The figure for Standard Pacific is 219.9%, and smaller player Beazer Homes' ratio is hanging dangerously at 743%. Besides NVR, which carries almost no debt, D.R. Horton (NYSE: DHI  ) is the only peer with modest leverage; its ratio is 65.2%.

Toll's debt-to-equity ratio is just 62.1%. It is also flush with cash and a short-term investments balance of $719.4 million. Toll, in fact, had over $1 billion of cash balance for several quarters. The company utilized cash for some big investments in the quarter.

Spending it the right way
Toll decided to foray into Seattle last year, and in the last quarter, spent nearly $145 million to purchase around 1,500 lots from Seattle-based luxury homebuilder CamWest. Seattle is a fragmented market with potential to grow. No wonder, then, that the nation's third-largest homebuilder followed Toll's footsteps and purchased lots in Seattle a few months back.

The CamWest move, indeed, was a bold step, as not many homebuilders are showing interest in big investments right now. Those like D.R. Horton are focusing more on powering existing homes with energy-efficiency tools, while PulteGroup is busy cleaning up its balance sheet.

The luxury homebuilder is also expanding in New York City. Toll tied up with Equity Residential to build a 40-story tower on Park Avenue in Manhattan, in which Toll will own condominiums on the 18 topmost floors. The company also has other buildings under construction in the area, including a 22-unit "boutique" condo that is expected to start delivering units next year.

With the recent flow of positive housing data, Toll's growth moves may well be its trump card when the market is up and running.

Signs of life
The National Association of Realtors reported yet another rise in the sale of previously owned homes. Condominium (which Toll specializes in) and co-op sales rose a seasonally adjusted 8.3% in January from its December levels. The median condo price was up 2% from last year.

New-home sales figures are in better shape too. January sales climbed 3.5% over last year's levels. But what is most remarkable is the fall in inventory. New houses up for sale were at 188,000 units in January 2011. This time, they are at 151,000 units. Falling inventory with rising sales is an ideal situation to spark off a housing recovery. The inventory glut is burning down gradually, and fewer homes are being built now. But with population still growing, demand for houses may begin to catch up with supply. When that happens, home prices will get a push, and homebuilders will again start building. In a nutshell, sales go up, inventories fall, prices rise, and construction ramps up -- a situation that could be realized someday soon.

So, when Toll's CEO, Douglas Yearley, says "the market feels healthier than it did one year ago," we know exactly what he is referring to.

The Foolish bottom line
Toll's net signed contracts were the highest for a first quarter in half a decade, suggesting a comeback of buyers. Its backlog units have gone up by 21% over last year, but that's because Toll has a good chunk of it locked in towers, which generally take longer to deliver than single-family homes.

Toll could well emerge as a winner once the housing market recovery gathers speed. Add Toll to your stock Watchlist -- our free, personalized stock-tracking service that will keep you updated on all the company's news and analysis.

Click here to add Toll Brothers to My Watchlist.

And if you're interesting in finding out about another promising financial stock, one that looks like the kind of stock Warren Buffett might have bought in his earlier years, you can click here to check out "The Stocks Only the Smartest Investors Are Buying."

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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