May 21, 2013 Comments

Markets did well today with Toronto up 1.0% and the Dow up 0.3%

Toll Brothers will report earnings before the open tomorrow (Wednesday morning). Toll Brothers fell 1.6% today, presumably on nervousness about the earnings.

Toll Brothers is pricing in a lot of growth and so any sign that it is not growing earnings (and especially any sign that the outlook is not rosy) could send the stock down. I show the adjusted P/E as a whopping 68, which means it has to grow earnings a lot to justify its price. I do expect it to grow earnings a lot but that’s not a certainty. And note it was last rated Speculative Buy at $34.13. As I contemplate what the stock might do tomorrow and as I recall that the stock got as low as $30 in mid-April I start to wonder if I should have sold more than I did at my $37 price where I did sell some last week on May 14. But that is the nature of markets especially if we get fixated on the short term. We second guess ourselves a little (or a lot). Anyhow if it rises tomorrow I will smile and probably sell some more and if instead it happens to drop toward the low thirties I imagine I will buy some. Toll Brothers strikes me as a well managed company. I expect it to do well, but that does depend on the rebounding housing market in the U.S.

I was reading that analysts expect 7 cents per share earnings this quarter and 28 cents per share next quarter. I find the notion of analyst earnings projections to be preposterous. In my opinion there is no way for analysts to predict earnings to that kind of implied accuracy unless it is a very predictable company (which Toll Brothers is not) or unless someone inside is whispering the number to analysts. As others have pointed out it is completely backward to suggest that a company has missed or beat analyst expectations. Instead it should be said that analysts over-estimated or under-estimated what the earnings would be.