Homebuilding stocks are strange beasts. They kind of flop around for awhile and then all of a sudden it seems like the stock market remembers them, and volatility comes out of nowhere. A look at the chart of Toll Brothers Inc (NYSE:TOL) kind of shows this.
As the housing market was on fire in the early part of the century, and especially as we got into its peak, TOL stock roared from about $20 to $55. There was a parabolic rise from mid-2004 to late 2005.
If you know anything about stocks, when you see a parabolic rise like this, a collapse is very likely. So in a bizarre way, you might have foreseen the mortgage crisis when then took Toll Brothers stock back down to $15 by late 2009.
Yet then the all clear came around in 2012, and TOL stock flew into the $30’s, and stayed there until the end of 2016, and it has zoomed up to $50. It fell back to $45 just recently at TOL stock reported earnings.
It feels as though Toll Brothers stock seems to anticipate major moves in homebuilding. If that’s true, then it’s possible we are seeing the beginning of a long-term decline. That would make sense because if the Federal Reserve is going to raise rates as many as four times this year, that would result in higher mortgage rates, which would depress housing prices and housing purchases.
However, earnings were really rather strong.
Net income was $101 million, up 43% from last year’s $70 million. So, right there, it’s difficult not to be impressed with the current state of affairs.
This came on a 28% increase in revenue to $1.18 billion, thanks to home building deliveries of 1,423 units, up 20%. Things also look good going forward. Net signed contract value was up 36% to $1.69 billion. Contracted units rose 20% to 1,822, leading to a total backlog value of $5.6 billion, up 28%.
This is all very, very strong. It’s not surprising, either, given that interest rates are still incredibly low.
From a geographic standpoint, the numbers are almost too good to be true. Western Regions and California were up 36% and 93% respectively. The South was up 17%, the North was up 15%, and only in the mid-Atlantic did numbers fall.
One of the things I like about Toll Brothers stock is that it isn’t entirely dependent on home-building. Toll Brothers also develops, owns, and operates golf courses and country clubs that go along with their master planned communities to generate additional revenue.
Toll Brothers also moved into the rental business in the Boston to Washington D.C. corridor, LA, San Francisco, San Diego, Atlanta, Dallas and Phoenix. This business extends to 43 parcels, accounting for just under 15,000 units.
To help incentivize individuals to buy houses, Toll also offers mortgage financing. It has about $1.5 billion in mortgage originations in 2017. This has always been an area that makes me nervous, because Toll takes on obligations that it must underwrite carefully. If a house purchase hinges on a less-than-quality mortgage borrower, Toll could find itself in trouble down the road.
For now, however, the numbers appear good. But the stock has had a great run and interest rates are not in its favor. Tread carefully.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
