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Toll Brothers Sits Atop A Comfy Cash Cushion

Posted: May 15, 2008 13:29 PM by Glenn Curtis

Tickers in this Article: DHI, HOV, TOL

The housing market's collapse has taken its toll on luxury homebuilder Toll Brothers (NYSE:TOL). Revenue in the latest quarter dropped 30% from last year, and its sales backlog is about half of what it was one year ago. This is all bad news, but it was also expected bad news. The homebuilder's substantial cash position, on the other hand, came as a surprise and could give the company some much-needed flexibility in the months ahead.

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Let's dive into the numbers to discover if there is any hope in all this mess. (To learn the difference between a company that can survive a share-price beating and one that can't, read Finding Profit In Troubled Stocks.)

Revenue, Backlog Dwindling
On Tuesday morning, the Pennsylvania-based company announced that second-quarter home building revenue came in at about $817.9 million. That's a roughly 30% drop from the $1.17 billion it reported in the comparable period last year.

Toll Brothers' backlog at the end of the period was approximately $2.08 billion. That's about 50% lower than the $4.15 billion it reported in Q2 last year, and a sequential decrease from the backlog at the end of Q1 which was $2.4 billion.

In short, this sales slump is a problem because it means Toll Brothers will have less leverage over fixed expenses. The shrinking backlog indicates that revenue in the near-term will continue to lag.

Analysts who were looking to do a little bottom fishing were no doubt hoping to see a real improvement. These numbers don't provide that, so it's unlikely we will see any whole-hearted recommendations. Frankly, unless a turnaround in those metrics occurs, I think that the analyst community will remain lukewarm.

Billion Dollar Cushion
The one thing that stands out to me about Toll Brothers preliminary Q2 numbers is its cash position, which stands at approximately $1.23 billion By my calculation that equates to about $7.79 per share (based on 157.8 million shares), which should help limit the downside to the stock.

Another positive is that this cash, coupled with the roughly $1.2 billion it reported to have available under its bank credit facility could be used to scoop up land on the cheap. This might not have a big near-term impact on earnings, but it should pay off handsomely down the road. (To learn more about cash the pros and cons of cash, read Cash-22: Is It Bad To Have Too Much Of A Good Thing? and Analyze Cash Flow The Easy Way.)

Toll Brothers' cash position is also attractive when compared to rival Hovnanian (NYSE:HOV) and D.R. Horton (NYSE:DHI). Hovnanian sported about $73 million (roughly $1.17 in cash per share) on its balance sheet, according to Yahoo Finance. Well-known homebuilder D.R. Horton has $519 million ($1.65 per share) in cash on its balance sheet. Although, it should be noted that Hovnanian recently announced a stock offering, and we are awaiting a full Q2 balance sheet with updated information.

Three Concerns before Buying in
Toll Brothers isn't out of the woods yet. There are three macroeconomic factors that investors should consider before they get too excited about the story.

There is still a glut of homes for sale in many areas of the country, particularly the East Coast where Toll Brothers has a large presence.
Many homebuilders are offering promotions this means that Toll Brothers may have to lower its prices to keep pace.
Finally, Toll's houses routinely sell for $500,000 or more, and the lending environment for jumbo mortgages is difficult.

This is a nasty trifecta that could put a damper on sales.

Bottom Line
Toll Brothers' preliminary sales and backlog numbers were disappointing, but this news was softened by its substantial cash cushion. We could see Toll Brothers purchase land at a low cost, which will eventually pay off. I think its access to the green stuff is also attractive when compared to some other major homebuilders.

Toll Brothers will reveal its final results on June 3. Hopefully, it will also give some guidance about the remainder of the year. Stay tuned.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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