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A little over two weeks ago I provided a comprehensive review of the tales and tales of woe that homebuilder executives are producing for public consumption. At that time, I noted that Toll Brothers' earnings warning was full of misplaced optimism for housing's immediate prospects. Sure enough, in its earnings conference call last week, Toll stuck to its script. Toll is clearly focused on the long view while dismissing the current downturn as just another cyclical event. Even more interesting is that Toll notes that general economic malaise has not precipitated this downturn, but it does not even consider that the downturn this time portends imminent economic malaise. This blindness is what caused me to mark Toll's stock down for further declines.
I have been particularly focused on Toll because it was one of the first homebuilders to report softening business conditions. So, I look to the company to call it plain. And it typically does. As usual, the standard media reports do not do justice to the earnings call. I always find it more interesting and informative to check out the actual conference call with a particular focus on the Q&A with analysts. This time was no different. Many analysts asked pointed questions and tried to uproot some of the optimism Toll seemed to exude (eventually, the executives did at least say they are not "bullish."). I jotted down a few noteworthy points that I thought I would share with those of you who are also fascinated with the tales of America's latest bubble...
- Toll's unbridled optimism has been displayed through its share buyback programs. In 2005, Toll spent $3.62M buying back shares at an average price of $30.25. This year, it has spent $1.68M buying back shares at an average price of $28.43. The stock today is now at $25.98 and has been as low as $22.22. We should not be surprised when we hear the CEO tell us that the company now has much more subdued repurchase plans. Of course, we must now wonder just how optimistic the executives are anymore.
- Current company forecasts assume that it can hold its own in the given downturn. I am sure every homebuilder feels the same way. They can't all be right...and maybe none of them has the correct assessment. It is also easy to have this kind of confidence when things are really only bad relative to the record housing activity we saw in 2004 and 2005. The economy is not even experiencing a recession right now.
- On a related note, Toll insists it will not give up the kinds of margins it has achieved over the last few years. The executives clearly do not think of this recent experience of hyper-activity in the housing market as a once-in-a-lifetime blessing. I have trouble believing that margins during a bubble can be achieved during a downturn or even recession. This kind of economic logic sure did not hold for technology copmanies.
- The CEO reiterated his common refrain that the economy remains strong. In fact, he claims that the same economic conditions that presided over the housing boom remain today. So, again, we should not be surprised that Toll remains confident and optimistic. If the economy remains unchanged, then surely demand will return sooner than later. The company is not yet concerned (publicly anyway) that the economy is about to take a turn for the worse (thanks to the downturn in housing!). Granted, the CEO did "slip" up and use the term recession to refer to current conditions, but I believe he was talking specifically in terms of the contraction in housing activity.
- The funniest moment of the earnings conference call came when the CEO was trying to make the point that strong population growth (and favorable demographics) provide conditions for a healthy housing industry. We have heard this particular refrain over and over again. It is analogous to the claims during the technology bubble that innovation had finally and forever conquered the economic cycle and recession. Well, in his excitement, the CEO proclaimed that in the last 20 years the U.S. has added something like 100 million people. Huh? A quick check of the census data shows that from 1980 to 2000 the U.S. went from a nation of 226.5M to 281.4M. The Census Bureau population clock shows that today the U.S. is 299.6M strong. This is all a far cry from the rapid expansion cited by the CEO!
- The strangest moment for me was to hear the executives talk fondly of the market for second homes as an additional prop holding up housing activity. =Gasp= We all know that the market in second homes is partly responsible for expanding the housing bubble in the first place. When so many are buying so much that they do not really need just because the loans are so cheap and redily available, you have to know this activity cannot be sustained. It is not something to build a business on. Many speculators are finding this out the hard way right now...
- Toll did not provide earnings guidance. That will come in the fourth (fiscal) quarter.
All in all, listening to the conference call was much more instructive than reading the boilerplate regurgigation of the printed earnings press release. As always, I encourage you to listen for yourself as well.
Be careful out there!