Shares of Toll Brothers
How it got here
A renewed confidence in a slow and steady housing recovery has helped push housing-related stocks higher over the past year. New home sales of 369,000 in May fueled the fire because they beat estimates by 22,000 and were the best result in over two years.
The improvement has helped Toll Brothers swing to a financial profit from a string of losses during the housing crisis. In the fiscal second quarter the company reported a 14% increase in units delivered, 17% increase in sales, and more importantly a $16.9 million net income.
The last five years have been rough but Toll Brothers has managed to emerge with a small profit for investors. The same can't be said for competitors D.R. Horton
Toll Brothers' stock may be rising, but financial results and value still aren't emerging for investors. Like the rest of the homebuilders below, return on assets is anemic and forward P/E ratios are still relatively high.
|
Company |
Price/Book |
Quarterly Revenue Growth |
Return on Assets |
Forward P/E |
|---|---|---|---|---|
| Toll Brothers | 1.9 | 16.9% | 1.0% | 31.4 |
| D.R. Horton | 2.2 | 28.0% | 2.1% | 20.0 |
| PulteGroup | 2.2 | 9.4% | 0.3% | 16.9 |
| KB Home | 2.2 | 11.4% | 0.8% | 111.4 |
Source: Yahoo! Finance.
The housing market will need to continue to steadily improve over the next few years to live up to these valuations, something I'm not sure it can do in a stagnant economy.
What's next?
Toll Brothers is tied to the strength of the economic recovery even more closely than most stocks because buyers could disappear again if the economy tanks. There is also a risk that housing will continue to stagnate when interest rates begin to rise. These factors make me think the recent high isn't something Toll will be able to surpass by a wide margin.
The CAPS community doesn't have a lot of faith, either, giving the stock a two-star rating (out of five). More than half of the players who have rated the stock think it will underperform the market.
Right now, the risk is just too high and the valuation too unattractive to be jumping into housing. The 52-week high was nice. I just don't think Toll is in for a repeat performance in coming months.
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