October 20, 2018 (Friday and Toll Brothers)

On Friday, the S&P 500 was about unchanged while Toronto was up 0.4%.

Stocks on the rise included:
CN Rail, up 1.9%.
Stantec up 3.3% on its pending divestiture of its problematic construction services division.
American Express up 3.8% on its Q3 earnings release
TFI International, up 2.4%

Stocks declining included:
Linamar down 1.5% and Toll Brothers down 4.1% to $30.02.

Toll Brothers fell along with other home builders on a report that existing home sales in the U.S. were weak in September.

“Total existing-home sales which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 3.4 percent from August to a seasonally adjusted rate of 5.15 million in September. Sales are now down 4.1 percent from a year ago (5.37 million in September 2017).”

There was both positive and negative news in the release:

“Total housing inventory at the end of September decreased from 1.91 million in August to 1.88 million existing homes available for sale, and is up from 1.86 million a year ago. Unsold inventory is at a 4.4-month supply at the current sales pace, up from 4.3 last month and 4.2 months a year ago.”

“The median existing-home price for all housing types in September was $258,100, up 4.2 percent from September 2017 ($247,600). September’s price increase marks the 79th straight month of year-over-year gains.”

For one of their largest federal mortgage insurance companies, Freddie Mac, “the average committed interest rate for a 30-year, conventional, fixed-rate mortgage increased to 4.63 percent in September from 4.55 percent in August. The average commitment rate for all of 2017 was 3.99 percent.”

These figures indicate some weakness in the market for existing homes but it does not appear to be major weakness. The market is forward looking and appears to be forecasting a larger decline for home builders.

Meanwhile Toll Brothers reported results have remained very strong and trailing year earnings per share are $3.91 per share with a P/E ratio of 7.5. The book value per share is $29.57 which is close to double the $15.36 level that it bottomed out at seven years ago in 2011 after several years of losses due to the financial crisis and housing price collapse in the U.S.A. Based on its backlog of existing signed contracts to build houses, earnings should climb about 20% in the next year. However, earnings growth will then slow because signed contracts in dollars the most recently reported quarter rose somewhat slower at 12%. And it’s certainly possible that the pace of signed contracts has slowed in the current quarter and could decline going forward.

Management would appear to view the shares as under-valued as it was buying back shares fairly heavily at prices that averaged $47.40 in Q1 of 2018. And Yahoo Finance is not showing any insider sales since January when the price was $52. In previous years insiders had sold fairly regularly.

The bottom line is that Toll Brothers certainly looks cheap to me. But I thought so as well at $44 back on March 2. (Since March 2, earnings are up substantially while the share price is down quite substantially) It is now selling at book value at a time when its earnings are quite high (the trailing ROE is 13.6% and the company was expecting that to hit 16% in its next report). During the financial crisis when it was reporting large losses the price bottomed out at around book value.



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