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Toll Brothers Earnings Less Bad, Outlook Improves for Homebuilders (TOL, BZH, KBH, LEN, PHM, XHB)


Toll Brothers Inc. (NYSE: TOL) reported earnings today, with an EPS loss of -$0.24 this morning, a bit worse than the consensus estimate of -$0.23. Revenues also missed estimates of $321.94 million, coming in at $311.3. Still, TOL stock is up more than 4.5% in early trading after earnings. Other home builders like Beazer Homes USA Inc. (NYSE: BZH), KB Home (NYSE: KBH), Lennar Corp. (NYSE: LEN), and PulteGroup, Inc. (NYSE: PHM) are also riding Toll Brother’s coattails. The SPDR S&P Homebuilders ETF (NYSE: XHB) is also gaining. All are up anywhere from about 2.5%-4% after Toll Brothers earnings.

Hope seems to be the operative strategy for homebuilders these day. TInvestors are probably looking at Monday’s report that existing home sales jumped 7.6% in April, compared with March sales. Everyone agrees that the federal tax credit played a significant role in the improvement, but what that means going forward is open to interpretation.

Related: Beazer Homes Earnings Hammer BZH Stock

The majority opinion seems to be that home sales will decline somewhat in the next few months, but then recover as the US economic recovery continues. Toll’s outgoing chairman/CEO noted that “deposits and traffic were up 23% and 11%, respectively” in the first three weeks of May, compared with the same period a year ago. He said that suggests that “the tax credit wasn’t the determinative factor — rather, we believe, the past few months’ activity has been driven by an increase in confidence among our buyers in their job security, their ability to sell their existing homes, and general trends in home prices.”

The company expects to deliver between 2,200 and 2,750 homes in 2010. In the first six months of Toll’s fiscal year, the company signed contracts for 1,346 units. Toll expects sell prices to aver $540,000-$560,000 per unit for the last six months of the year.

In order for the homebuilders really to turn the corner, a lot of factors must improve. Home buyers are going to have to get more impressed with the low mortgage rates than they currently appear to be. If interest rates go up at all, home buying could simply dry up again. The financial troubles in Europe are going to have to either get fixed or move from the front pages to the back pages of the daily papers.

Unemployment rates have also got to get steadily lower. Headline rates near 10% have a chilling effect on potential buyers who may wonder if their own jobs are secure.

The homebuilders can’t control a lot of the news that will affect, nor do they figure a lot into the equation that will put some energy back into the market. They are at the mercy of events that they can’t control and they can only react. That’s not a position of strength going forward.

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