What happened
Shares of Toll Brothers (TOL +0.64%), one of the largest homebuilders in the United States, rose 13% in September, according to data provided by S&P Global Market Intelligence. What's most interesting about the big monthly advance, however, is that it basically started on Sept 9. And while other homebuilders had decent months, too, it was a couple days of big gains following Sept. 9 that pushed Toll's monthly gain into the double digits.
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So what
The big news was that Toll Brothers issued $400 million of debt, which it announced on the 9th. The notes carry a modest interest rate of 3.8% and mature in 2029.
There are a couple of worthwhile takeaways here. First, Toll Brothers was able to issue the bonds at a solid rate, showing the debt investors are generally positive on the company's prospects and ability to pay.
Which taps into the second key issue: Toll Brothers has a fair amount of leverage on its balance sheet. For example, Toll Brothers' debt-to-EBITDA ratio is around 4.1 times compared to more conservatively financed peer PulteGroup, which has a debt-to-EBITDA ratio of about 2.5 times. Moreover, Toll had $250 million in debt coming due in 2020. So this debt sale allowed it to push out that maturity at a modest cost. It now doesn't have any material maturities until 2022.
All in all, the debt sale gave Toll Brothers some important breathing room. That was very good news for the homebuilder and its stock and helps to explain the monthly outperformance.
Now what
Although the debt sale was a notable event for Toll Brothers, investors shouldn't get too caught up in the advance. Some bigger-picture issues must be addressed, not least of which is that homebuilding is a cyclical industry and is highly economically sensitive. With the current expansion among the longest on record, investors should be thinking about the very real possibility of a recession sooner rather than later when considering buying stock in any homebuilder today. And while Toll Brothers' debt sale should make it easier to survive the next economic downturn, it doesn't change the fact that it has a more leveraged balance sheet than some of its peers.
