Five months ago, I flagged $45M in combined stock sales by the Toll brothers in their company’s stock. Since then, Toll Brothers (TOL) has been on a roller coaster ride: the stock was first up 15% from the time of my last post, then a two-month and 26% decline, and now a two-month 40% run. The latest run peaked on a one-day, 14% pop on preliminary third quarter guidance on August 12th; the earnings report two weeks later was met with a tepid response. So, perhaps we should not be surprised to find that Robert Toll, CEO and Board Chairman, has decided to unload another $10.4M in stock. This time, he is joined by Barzilay Zvi, President and COO, who has unloaded $5.1M in stock. (Many thanks to a reader who pointed out these sales to me).
As always, I do not begrudge insiders their profits on selling company stock. They hold the stock as part of compensation packages, and of course they want to make money. I just do not want to join the rest of this forgiving market that has continued to happily provide the liquidity for the massive amounts of company and insider stock that has been unloaded into the market. Moreover, I am alarmed by the sale of $60.5M in this company’s stock (over 5 months) at what is supposed to be the bottom of a severe housing recession. It seems to me that the insiders could make a whole lot more money as the reported recovery unfolds in the near future. In other words, these massive stock sales tell me to remain highly skeptical of any and all calls that the housing market has reached the bottom of its woes.
Since the stock market met TOL’s last earnings report with a large yawn despite signs of increasing demand, I decided to review the transcript from Seeking Alpha to understand why there was so little excitement, especially when the preliminary guidance leading up to this report was practically heralded as a sign of deliverance.
There were three yellow flags that showed up in the conference call, all in the analyst Q&A:
- Toll would not rule out the possibility of a double-dip recession. To eliminate the possibility, he recommended that the government “…extend the [housing tax] credit for a short time to enhance it so that it’s not just for first time home buyers but for all home buyers.”
- Ivy Zelman of Zelman & Associates delivered the coldest reality check of the hour by insisting on trying to reconcile Toll’s prevailing optimism with dour economic statistics: “I sense a little optimism with, I don’t want to call it Kool-Aid, but little concern about the increase in foreclosures at the higher end that are in process right now with Option ARMs and Alt-A and overall foreclosures in process up about 90% today year-over-year…I’m just wondering if your views of stabilization might be a little bit premature and how much risk do you think is out there and are you concerned at all as I am?” Toll admitted that he is not as concerned because he is focused on the current increase in demand. Zelman (rightfully) added later “I guess what I’m just trying to point out and make sure that Toll Brothers is thinking about as well is the headwind that might be fourth quarter 2009, macro fourth quarter headwind or first quarter 2010, not to mention all the unemployment. It just sounded like you guys are very optimistic and I just don’t understand why this is not being taken into more consideration and maybe you are thinking about it.” Toll only conceded partially by reminding Zelman that TOL’s optimism is tempered by its reluctance to buy much land: “…while we’re optimistic, we’re also unwilling to make bets on the future being much different than the current market, which is how we analyzed the land that we purchased.” I think at best, Toll’s responses were incomplete. Zelman’s critique is particularly poignant to me because I remember conference calls during the height of the housing bubble where homebuilder executives insisted that all was well with the market because unemployment remained low. No one ever pondered what might happen when the economy slowed down. So now, I have a hard time accepting that an unemployment rate tripping into double digits can provide fodder for a sustainable recovery. For example, Meredith Whitney believes these high unemployment levels could drive housing prices down another 25%.
- Most importantly, Toll admitted that he is a lot more optimistic than his own regional VPs who seem to be closer to the action in the field: “I try to encourage opening up a few of the communities that I felt were ready and the team said no, they weren’t ready to open them. They want to wait for a better market…the market is not strong enough to take a chance, because in order to open up communities there’s considerable dollars involved. You’ve got to get your samples up and furnish them. You’ve got to put your roads in. The improvement budget can be pretty high…We haven’t got anybody yet volunteering to open new communities in the next quarter. You’ve asked me about 2010, and you know as much as I know.”
The regional VPs who waved the big boss off must see the same warning signs that have encouraged all the insider stock sales.
Toll is known for his colorful commentary, and this conference call was no exception. This time around, I particularly enjoyed the ironic contrast between his desire to get more government aid for all homebuyers while at the same time bemoaning the government assistance to banks that relieves any pressure to “disgorge” land at firesale prices. Apparently, TOL cleaned up on such distressed sales back in 1989-1991. But he still seemed “cheered” by the prospect that some banks will eventually have to give in: “…at a certain point Treasury and the Fed are going to be done and they’re going to say…those that haven’t gotten themselves healthy, maybe you’ve had enough of a time of it and it’s time to move this stuff off your books or else it may be time to shut your doors and get rid of your stuff.”
Also note that TOL has managed to reduce incentives and increase prices in some of its stronger markets: Mid-Atlantic and Northeastern territories, Florida (especially the West Coast), and Northern and Southern California.
Be careful out there!
Full disclosure: long puts on TOL and XHB