Smart Investing


September 28, 2012


Inspecting homebuilders as housing market recovers

For quite a while now, I have been posting good news on the turnaround in the housing market on my daily Facebook and LinkedIn posts.

Don’t get too excited. While I have been talking about the good numbers in the housing sector, it does not mean we are in a housing boom. I believe we are in a reversal, or stabilization, from the bottom. This is good news for homeowners, but not good news for investors.

I think there will be better places for investors to make money over the next three years or so that will outperform the real estate market.

I’ve been thinking for the past week or two: Would this be a good time to look at the homebuilders? I even got a request from Don in Dallas about what I thought.

Because Don and I are thinking the same thing, I’m sure many others are as well.

There are many different homebuilders to look at: They range in market cap from Beazer Homes' (NYSE: BZH) $361 million, to D.R. Horton (NYSE: DHI), which has a market cap of $6.7 billion. I’m sure there are companies that are smaller than Beazer, but I would not be comfortable going with a market cap much less than $300 million.

My first choice to write about was Lennar (NYSE: LEN). The problem is that it reported earnings recently, and its current balance sheet is not yet available.

Instead I chose Toll Brothers (NYSE: TOL), because it was the only builder out of the top six that I looked at that had higher earnings in 2013 than 2012, and had positive earnings per share.

Toll Brothers is known for building luxury homes and apartment buildings. It has a market cap of $5.7 billion.

I was surprised to learn the company is headquartered in Horsham, Pa. — for some reason I thought it would be based in Texas — and has 2,215 employees. The company does not pay a dividend, and the stock has a 52-week high/low of $37.08/13.16.

Toll Brothers' trailing 12-month PE ratio is well on the high side at 66.3 — twice that of the industry 31. Price-to-sales is also on the lofty side at 3.6, compared to the industry average of 0.50. Price to book value favors the company at 2.2, versus the industry at 4.4. However, price-to-cash-flow goes back to the industry side at 14.20, well below the company PCF of 54.3.

I’m glad to see that sales were up 15.7 percent for Toll Brothers, better than the year-over-year industry sales growth of 12 percent. Toll Brothers did even better on its earnings-per-share growth, year over year, watching it rise 20.2 percent when the industry average experienced a 21 percent decline.

When looking at the balance sheet, I noticed something strange — there are no current assets or current liabilities. I called the company and could not get any answers as to why. I also checked two other balance sheets, one from Lennar and one from Hovnanian Enterprises (NYSE: HOV), and neither of them listed current assets or liabilities. My guess would be it’s an accounting issue, but what I noticed for Toll Brothers is that it has inventory of $3.8 billion. I know this is all primarily in homes and real estate, which could be short term, but maybe not.

If I were to invest in this company, I would want to know the answer to that before committing any funds. The debt-to-equity could be a problem for this company at 72.8 versus the industry at 26.4. My expectation is that the real estate market should continue to do well, but what if I’m wrong?

An investor does not want to be stuck with a high-debt company if things do slow down. No matter who they are or what they do, do not hold high-debt companies; they can cause you to lose a lot of money in your portfolio when you least expect it.

If I held this company in my portfolio, I would be worried about the inventory turnover of only 0.4, compared to the industry average of 19.2. I know these are luxury homes, but still this is a comparison of homebuilding by the TRBC industry.

Looking at the forward earnings, there are 20 analysts who are watching Toll Brothers and estimating earnings per share out to October 2013. There is a wide range from a low of 65 cents up to a high of $1.55 per share, an indication that the mean estimate of $1.06 for the fiscal year ending October 2013 is not a strong number.

On the bright side, the mean estimate for October 2013 90 days ago was only 94 cents, so it has increased nearly 13 percent in three months. However, the stock has been climbing like a rocket this year, and now the stock trades at a lofty 31-plus forward PE. The stock may continue to climb higher based on momentum, but this is why many investors lose money investing — they have no discipline about when to get in or out.

Myself, I see no value in this company or any of the builders. Unfortunately the stock price has risen above a good value for a true investor to get in on the potential earnings growth going forward.

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


September 28, 2012