Toll Brothers: Why Their Bad News Is Thought To Be Pretty Good

Toll Brothers
Toll Brothers

So how do you report a 34 percent drop in revenue, a 35% drop in net contracts and a nearly 20% cancellation rate and still come out as the darling of the home building analysts? Welcome to today’s housing market.

Toll Brothers managed to beat expectations with its preliminary Q3 forecast (not that it actually gave us an EPS estimate). The luxury home builder is still bleeding when it comes to contracts and backlogs, but the one thing it seems to have good supply of is cash.

From CEO Robert Toll:

At third-quarter-end, our cash position of approximately $1.5 billion, combined with approximately $1.3 billion of availability under our bank credit facility, which extends to March 2011, provides us with nearly $2.8 billion of liquidity. We believe our current inventory and liquidity give us a solid foundation to operate and succeed in the current difficult climate.

“They continue to build cash, a very liquid company,” says UBS analyst David Goldberg.

Goldberg says much of the competition is cash-strapped, and so “they’re going to have a tougher time because of the liquidity constraints that are being felt in the market, and that leads to potentially market share gains.”

Citigroup initiated coverage of Toll with a "buy," largely due to the builder’s capital position (only Pulte garnered that rating, with all the other big names on "hold"). In other words, it’s all about survival, not so much about building houses these days.

While the existing home market could possibly be bumping along the bottom, the new home market continues to weaken. CEO Robert Toll claims there is “pent up demand” out there. The question is: When does that demand shows up on the balance sheet?

Questions? Comments?