Toll Brothers: No Bellwether
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Toll Brothers (NYSE: TOL) is not the stock to look at to take the pulse of the overall homebuilding industry. Actually, factor it out to determine going long/short on stocks or sitting out the recent uptick in homebuilding stock prices.
Right now, Toll Brothers is at about 23, with a 52-week range of 13.16 to 23.96. When it reported the numbers last December, which included higher than expected profits with greater margins, some saw all this as a sign of the bottoming of the housing market. Not necessarily. The reality is: In the current market, investors need to pay close attention to what they’re doing because there seems to be irrational exuberance in this general homebuilding category. UBS analysts are among those not bullish, reports USA TODAY. For example, UBS lowered the rating on Lennar, D.R. Horton, as well as Toll Brothers to sell from neutral. As investors know, the stock price of many of the players has been up. Yet, there is a glut of used homes, selling cheaply, already on the market. When market value rises to match the amount of the mortgage, more existing homes will be put up for sales. There's a glut now. There will be a glut of used homes for a long time. Why build a new home?
Here is a snapshot of the stock prices of the major homebuilders.
- Lennar Corporation (NYSE: LEN) is at about 22.14, with a 52-week range of 12.14 to 23.47.
- D.R. Horton (NYSE: DHI) is at about 14.36, with the 52-week range of 8.03 to 14.79.
- MDC Holdings (NYSE: MDC) is at about 24.72, with the 52-week range of 14.79 to 32.10.
- Pulte Group (NYSE: PHM), is at about 8.37, with a 52-week range of 3.29 to 8.53.
There is plenty of reason not to regard Toll Brothers as a bellwether. After all, that’s like deconstructing what’s going on in Tiffany and Company to gain insight into J.C. Penney and Macy’s.
This is obvious in what Toll Brothers Chief Executive Officer Douglas C. Yearley, Jr. has been telling the media, including Fox Business News. For example, the average cost of what it builds is $620,000 versus the national average of $291,400.
Secondly, those are primarlily single-family homes with some building of upscale condos such as in Manhattan. Yet, the housing growth that has been happening has been largely generated by building multi-family ventures which are not in the luxury segment. According to the Housing Starts statistics, there has been a 69.1 percent rise in the start of multi-family projects.
Third, for Toll Brothers, the tipping point in its customer’s decision to buy is confidence in the economy, not credit problems. Yet, even Lennar Chief Executive Officer Stuart Miller told analysts its own customers are battling the higher bar on lending standards and their own subpar credit rating.
Also, a value to the affluent Toll Brothers customer is the mortgage tax deduction. That’s important to them. Meanwhile the rest of the 99 percent, observes Motley Fool, are evaluating if home ownership is a smart investment in general.
When making investment decisions, treat the luxury market separately from the mainstream. F. Scott Fitzgerald shrewdly concluded the rich are different from the rest.
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