Tuesday, November 08, 2005

“It Appears We May Be Entering a Period of More Moderate…”

"Yes, it's been trending up, which is really astounding. Every day I get the New York Times and The Wall Street Journal, and I don't think they've missed a bad article in our regard in the last two to three weeks. And it's amazing to me that we're doing the business that we're doing, which is tremendous, in the face of this bad press.

I mean, if there's anybody left in the U.S. that hasn't read an article that this is the absolute peak, I'd like to meet them. So who are all these people that are buying at the absolute peak, according to the newspaper?

They're people who want the move up home, whether it be attached, multifamily, or single, and aren't willing to play the market according to the press. It's really astounding to me that we've been doing the business that we've been doing." —Toll Brothers CEO Robert Toll, August 8, 2005

Well the news this morning is about homebuilders—specifically Toll Brothers, and more specifically CEO Robert Toll's cautionary commentary in this morning’s earnings release, which is quite a change from the “trees-grow-to-the-sky” view which management has consistently (and correctly) given during every short-term wiggle in the housing market for the last several years (see August 8th quote above).

The contents of today’s press release from Toll Brothers need no elaboration from me:

``In addition to delays in community openings, about twenty-five percent of our communities still have backlogs extending twelve months or more, and, therefore, are not open for sale on a regular basis. Even though we produced record contracts against FY 2004's challenging fourth quarter comparison (FY 2004's fourth quarter contracts were up 51% above FY 2003's fourth quarter), we believe a shortage of selling communities, coupled with some softening of demand in a number of markets, negatively impacted our contract results.

``Since Hurricane Katrina in early September, we have observed buyers taking longer to make their purchasing decision. We attribute this change to the significant decline in consumer confidence in the last two months that was precipitated by the hurricanes and their aftermath, and to record gas prices.

``It appears we may be entering a period of more moderate home price increases, more typical of the past decade than the past two years. Comparing the current market to the past five years, excluding 2004, which was extraordinary, FY 2005's fourth quarter 'per-community' non-binding reservation deposits exceeded the five-year average from FY 1999 to FY 2003 in seven of the last nine weeks (encompassing September and October) of FY 2005.

``We remain optimistic. The demographics for our industry remain outstanding due to continuing, regulation-induced, constraints on lot supplies and a growing number of affluent households. With approximately 81,000 lots under our control, compared to 60,189 at FYE 2004, and a projection of approximately 265 selling communities by FYE 2006, we believe we will enjoy continued growth as we expand geographically, diversify our product lines and continue to gain market share.''

Expect plenty of fireworks on the conference call at 2pm, Eastern Standard Time.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


SiamTwin said...

Looks like Mr. Tolls recent stock sales, in the wake of his August comments, were particularly well-timed. mmmmmmmmm....

econjohn said...

i don't have the text of the august conference call at hand, but note that in that toll did not say "we expect this to continue indefinitely." rather, he stated simply "we're still rockin' despite the press. and i am impressed, nay, amazed, by it." if he sold, i don't sense it's because he had inside info. rather, like just about every other sane individual, he knew it wouldn't last.

timothyb said...

Katrina was two months ago, gas prices are almost 30% below peak prices, but those two factors are what he thinks will affect 2006 sales?

You should have seen his face drop when his stock sales were mentioned during his interview on CNBC.

Don said...

That CNBC interview was a classic. I saw it online at the Wall Street Journal website. Here's how it wrapped up after Michelle Cabruso-Cabrera thanked Toll for the interview:

Cabruso-Cabrera: “It’s been a tough day for you as well. You’re a big stockholder, right?”

Bob Toll: (grin on his face): “I am a big stockholder, don’t cry for me it’s not that tough.”

Cabruso-Cabrera: “That’s right, you’ve also sold a lot recently.” (Toll looks like he's been sucker punched; his grin quickly disappears and he looks down.)

DaleW said...

Katrina was two months ago, gas prices are almost 30% below peak prices, but those two factors are what he thinks will affect 2006 sales?

Sure, but home buyers place a big weighting on the most recent events in deciding what they will do next and the slowdown in the momentum of sales also effects the ability of those sellers to move up to their next home. Plus the 10 year treasury yield is up 40-60 bps since Katrina despite the decline in the factors you mentioned.

UrsaMajor245 said...

Bob TOL(l)'s not the only one who sold at near market top in the homebuilders' sector. Rising interest rates, inflation, higher energy prices take their TOL(l) on that sector, eventually.

The homebuilder sector put in a classic "triple top" this summer and I don't blame any exec in that sector from cashing out.

Its_strange said...

You going to take new money ( wages , investment income type stuff ) and spend it on fixing or improving a asset ( home ) that is losing value or remaining flat ? My gut tells me everytime someone read thier home had increased in value they went out and bought a new front door or a dogwood tree . I think they read that everyday for years now and now i figure the headlines will change.

Don said...

Feeding like pigs at a trough and cashing out is a way of life for Bob Toll and a large number of other executives of the publicly traded home builders.

Pre-housing bubble, in 1999 Toll Brothers had net income of $103 million. Here from the March, 2005 proxy is Bob Toll's compensation for 2002, 2003 and 2004:

2002: $10.648 million salary and bonus, $0.479 million other compensation, 500,000 fixed price long-term stock options.

2003: $21.444 million salary and bonus, $0.999 million other, 250,000 options.

2004: $31.702 million salary and bonus, $6.207 million other, 250,000 options.

With regard to those option grants, keep in mind that as of March, 2005 there were only about 81 million shares of stock outstanding. A 250,000 share grant to one person is substantial.

As of the March proxy, counting options Bob Toll owned 20% of the stock of Toll Brothers. His brother owned another 9.5%. Does Bob Toll need a large grant of stock options every year to motivate him? As of the proxy date, he had options on 4,823,500 shares that were $153 million in the money.

Of course he's going to sell stock when it's high. And whether the stock is low or high, every year his hand-picked compensation committee is going to give him another big pile of stock options.

Jeff Matthews said...

"Scott Fish": no blog pollution, please.