Monday, September 18, 2006

Mr. Toll at "It" Again

by Vitaliy N. Katsenelson, CFA September 7th, 2006 - I wrote about Mr. Toll, CEO of Toll Brothers (NYSE: TOL) before. But Mr. Toll still keeps amazing me. Reader sent me the following link to Mr. Toll's latest interview.

I just love when a person who made hundreds of millions on building houses pleads ignorance. This comment insults everybody’s intelligence: “The current slowdown is 'strange' because it cannot be explained by macroeconomic factors such as interest rates or unemployment that traditionally reduce demand for houses," Toll said. "We have an apparently decent economy."

Why? Because he just told us in a previous statement: “The current downturn is mostly the result of a 'severe overhang' in supply that Toll estimated at 15 percent to 20 percent more than the market can easily absorb. That was driven by 'tremendous speculation' by home buyers who never intended to occupy seeking a quick profit from a rising market, and by builders who constructed homes before securing buyers, he said.”

I don’t have anything against Mr. Toll, in fact I don’t even follow the stock. But I find his comments are very insulting. You did not have to be a braniac to know that the housing market was going through a bubble. I am waiting until he’ll take Mr. Byrne' (from (Nasdaq: OSTK) tactic and will start blaming the decline in housing prices on short sellers – he is already blaming other builders. There is a unique element to the housing industry – once you build and sell a house, it starts competing with your future houses because at some point that house will make it back on the market. Mr. Toll knows about it but he pleads ignorance.

I don’t know if housing stocks are cheap enough. I am aware that one has to be able to differentiate between a good company and a good stock. There is a possibility that despite the housing market going through some very tough times, the housing stocks’ valuations reflect a scenario that is a lot worse that could possibly transpire. I know some very smart investors for whom I have a tremendous respect that made that case. I have an un-quantified hunch that they probably are not cheap enough – Toll Brothers (TOL) is still trading at above 2004 levels. I am not sure that 2004 earnings will be coming back. Looking at past earnings is a fruitless exercise as they are meaningless for the forward looking analysis – the past is unlikely to repeat for quite awhile.


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