Like a kid who's spent the year struggling in class, homebuilder Toll Brothers (NYSE:TOL) reluctantly delivered its fourth-quarter report card on Thursday December 6.
Certainly, there were plenty of F's; however, the grades weren't quite as bad as Wall Street expected. Dare I say it, there were actually a few bright points, which leads me to believe that the stock could be nearing a bottom.
First the Bad News
In the period ended October 31, the company reported a loss of $81.8 million (52 cents a share). Even when you back out one-time write offs the company booked in the quarter, Toll still would have earned approximately 72 cents a share. That is a pittance compared to the $173.8 million ($1.07 a share) profit it earned in the comparable period last year.
On the top line, its performance was equally sad. In the period the company generated $1.17 billion in revenue - a 35% decline from a year ago.
Over the next several quarters, I'm not expecting too much in the way of relief. The dollar value of the company's net signed contracts was down in the period, and management said that it's not going to provide earnings guidance for 2008, never a good sign! Things are so shaky right now that the company's guidance for new home deliveries in fiscal 2008 is somewhere between 3,900 and 5,100 homes. That is huge potential variance!
The Good News
While the bottom line results were awful, the company ended the quarter with roughly $900 million in cash (and equivalents). That equates to about $5.74 per share (based upon 156.7 million shares outstanding). That's not too shabby given that the stock is trading just north of $20.
Despite its lousy quarterly numbers, it's important to note that Toll's EPS figure actually came in much better than the 77-79 cent per share loss that analysts had forecast. It's always nice to have an upside surprise, especially in this market and considering the troubles other homebuilders are having.
Another thing that's piqued my interest is that Toll's chief executive, Robert Toll, has finally had an epiphany. Instead of the irrational exuberance Toll has seemingly exhibited in the past he was quoted in a recent CNNMoney.com article as saying that housing prices "may not have stopped falling yet." That same article also quoted Toll as saying that it may not be the best time to buy a home. I view Toll's apparent epiphany as a good thing, if for no other reason than, he might use it as a catalyst to find ways to enhance shareholder value. Finally, the recent bounce in the share price leads me to think that there are still believers out there, and that the worst could now be behind us.
Now does this mean, I'm considering bottom fishing the stock at these levels? Not a chance. I'd hold off at least another couple of quarters to get a strong signal that the high-end housing market has turned, or is about to turn. (To learn more, see Warren Buffett: How He Does It.)
Bottom Line
Toll Brothers Q3 earnings release was lousy on several fronts. However, there are some bright spots to the story, and I think they are worth noting. For example, its quarterly numbers came in north of analysts estimates, its CEO now seems aware of the seriousness of the situation, and the company continues to have a substantial amount of money on its books. I will continue to keep a close eye on the situation and so should savvy investors.
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