These are strange times. Toll Brothers (NYSE:TOL) reported some pretty weak results, and investors sent the homebuilder's stock soaring 5.3% higher. What's going on?
The only thing that happened was that it earned $0.16 a share for the quarter, instead of losing money as Wall Street analysts had expected. And that's hardly a reason to cheer, particularly since earnings plummeted by 85%. I also don't find the $0.54 per share in impairment charges very comforting, since that means the land the company bought isn't worth what it paid. Oh, and cancellations were higher than at any time during the company's 21 year history as a public company.
Some onlookers may have also parsed Robert Toll's words, taken a positive-sounding comment, and run with it. The chairman and CEO said Toll Brothers may be less immune than some other homebuilders to the current downturn, since his company builds luxury homes, and the people who buy such homes are not subprime borrowers. This news might be encouraging for similar homebuilders, such as Ryland (NYSE:RYL) or Hovnanian (NYSE:HOV).
But the jumbo mortgages for those upscale homes may also be harder for banks to package and sell, since they don't qualify for backing from Federal National Mortgage (NYSE:FNM), a.k.a. Fannie Mae. And even Toll Brothers itself remains concerned about troubles in the secondary mortgage market, because troubles there could lead to higher rates and credit standards even at the upper end.
The company is taking the prudent step of slowing new-home production, until the oversupply in the market gets worked down and falls more in line with demand. At the end of the quarter, backlog was $3.67 billion, compared with $5.59 billion a year ago. So at least this metric is moving in the right direction.
It's an uncertain market, particularly for homebuilders. Toll Brothers' balance sheet is in decent shape, with $770 million in cash, so its survival shouldn't be in doubt, yet even this company isn't comfortable providing guidance in the current climate. In any event, it seems like an odd time to jump into this stock, and I'd advise against it.
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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at [email protected]. He doesn't have any positions in the companies mentioned. Fannie Mae is an Inside Value recommendation. The Fool has a disclosure policy.
