Equity Research and Investment Analysis

Last week, Toll Brothers Inc (TOL) chairman and CEO Bob Toll sold 791,000 shares from his vast portfolio of TOL stock. He still owns nearly 16 million shares or close to 10 percent of the company's stock, but he has a history of lightening up at the opportune time. He has sold about $50 million worth of stock this year. I can't say that I blame him, as frequent readers of this blog are aware, at Ockham we believe that Toll Brothers is Overvalued.

Luxury homebuilder Toll Brothers (TOL) will report earnings Wednesday, and analysts are expecting to see a loss of $.32 per share ex-items. We see no catalysts for a turnaround in TOL or its competitors, and we continue to rate most in the sector as Overvalued.

Even though pending home sales have improved consistently over the past few months, as of yet existing home sales (recorded when the sale closes) have been much more volatile. Existing home sales were lower in February, increased in March and only slightly increased in April by about 2.5 percent. The disparity between the pending home sales and existing home sales suggests that mortgages are tougher to come buy as banks have tightened their lending standards. This seems to correlate with recent data suggesting that lenders have not yet resumed lending at a historically normal pace.

Toll is a luxury homebuilder which will be a tough place to be for some time, as home values have declined on existing homes making them even better competition. So, even if the worst is over, which it may be, we think there are better stocks to take advantage of the recovery.

The newest beneficiary of a government bailout appears to be the home builders. Even as Toll Brothers reported a horrid fiscal year, the market pushed the stock higher as the rest of the market dropped. What is going on here? Where will it stop?

We are generally fairly bullish on equities right now, but home builders is one segment of the market that we simply cannot get behind. We look at Toll Brothers abysmal quarterly results and wonder, why have these homebuilder stocks not getting pounded? We don't have a good answer.

Toll Brothers Inc. (TOL) on Tuesday disclosed its third straight quarterly loss for the quarter ended April 30, 2008. TOL lost $93.7 million or $.59 per share, but the results were well ahead of Wall Street estimates, which called for a loss of $.89 per share. The company claimed a pre-tax write-down of $288.1 million [...]