Toll Brothers lead homebuilders on wild ride

by Ryan Smith05 Dec 2018

Toll Brothers led the homebuilding sector on a roller coaster ride after reporting earnings, its shares falling as much as 10 percent before moving briefly into positive territory just as the broader market started plummeting, then finally closing down.

While orders plunged 13 percent in the fourth quarter from a year earlier, Toll’s results were generally strong. Net income rose 62 percent to $311.0 million, or $2.08 a share. That beat the highest analyst’s estimate in a Bloomberg survey. Toll said it would evaluate the market during the spring selling season before giving 2019 guidance.

Toll executives speaking on a conference call described slowing demand in California and elsewhere, though Chief Executive Officer Doug Yearley said he didn’t expect the slump to last long.

“I’m not here to predict how long this current market conditions will continue except to say that it just doesn’t feel like a slowdown that will have a long duration," Yearley said on the call. “The fundamentals are strong with the macro U.S. economy and with the housing business.”

Yearley also said the company will benefit in the Washington area from Amazon.com Inc.’s decision to locate offices there and in the Long Island City neighborhood of Queens, New York, where Toll will look for opportunities.

“We are excited to have a large operation in northern Virginia and Maryland and a large and growing apartment business in Washington D.C. proper so that aligns great with the northern Virginia Amazon headquarters,” Yearley said. “We of course also have a significant presence in New York and we’re not in Long Island City but we are looking all over that area.”

Investors in homebuilder stocks are jittery as home sales slide, especially in expensive markets like California. But Toll has some advantages: as the largest luxury builder, it has a niche. Its land is typically well located and its buyers are affluent so they should be less sensitive to mortgage rate increases.

The company’s shares fell 1.6 percent to close at $32.99; they are down 31.3 percent this year. The S15 Supercomposite Homebuilders’ Index fell 4.8 percent, and is down 31.2 percent this year. The Dow Jones Industrial Average fell almost 800 points, or 3.1 percent, while the S&P 500 Index dropped 3.2 percent.

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