Toll Brothers (TOL) - short candidate ?

- company = Toll Brothers (www.tollbrothers.com)
- ticker = TOL (NYSE)
- current share price = 20$
- book value per share = 20.4$
- earnings per share = -1.88$

- context: residential real estate market bust.
For more on the residential real estate market bust, there are zillions of things to read. Some interesting pages to start with:
http://en.wikipedia.org/wiki/United_States_housing_bubble
http://www.patrick.net
http://www.alkalizeforhealth.net/Ldebtclock.htm

- my personal prediction, for what it is worth:
i would guess TOL will keep losing money in the next 4 quarters at least; and its equity will decrease due to assets writedowns.
Scenario for end 2009: EPS = -2$; book value down from 20.4$ to about 17$ a share; and outlook will still be grim for the following 3 years. At that point, the market will value TOL at less than 15$, possibly less than 10$.
Risks: one risk of taking a short position is that a rally could take this stock higher; in the hope that the bottom is behind us... I do not see how such scenario could survive 3 quarters of bad news.
The prices of houses are still decreasing.

I recommend to draw a graph of TOL equity (book value) from 2000 to 2008. What you will see is a very nice (incomplete) bell curve. If you ask me, the bell curve will be complete in about 2 years time, and TOL equity will be back to 1.5 billion $. At which point the market will have realized that selling houses is not anymore the great business it was in 2000 to 2005. The long term graph of home values show here is very telling:
http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png
Note that Robert Shiller was one of the few who called both the dot com bubble and the housing bubble.
By the way the chart was presented by Robert Shiller in his book "Irrational exuberance" which I highly recommend to anyone interested in the current economic events in the world. And if you own stocks of TOL and have not read it yet, please do. The book is not about home builder, but gives great infos on the housing market across the last century.


I find the following interview of Robert Toll (CEO of Toll Brothers) very interesting.
The interview is from June 3rd 2008.
(also available here: http://www.foxbusiness.com/video/index.html?playerId=videolandingpage&maven_playlistId=1292d14d0e3afdcf0b31500afefb92724c08f046&maven_referrer=rss&referralPlaylistId=1292d14d0e3afdcf0b31500afefb92724c08f046&referralObject=1100421)



Some quotes from Robert Toll I find particularly interesting:
3:30-3:40 -> "Our buyers are not sitting around the kitchen table waiting to hear what the Fed said..."
4:22-4:40 -> "The problem is not the down payment; the problem is not the interest rate; the problem is the sale of the old home and the problem is the fear that I gonna look bad, that I didn´t make the right move, that I wasted time and money here, and that I should have waited..."

If this is true, and I guess he is the best person to know, then I would be worried for future earnings and future inventory evaluation.
I find it hard to believe that households will suddenly think that the market has turned and will go up. This will take years I guess. Even if there is a huge fiscal stimulus or else.


Note that having only short positions is risky. The market can rally longer than you can stay solvent as often said.
By being long a stock you think is undervalued, and short a stock you think is overvalued, you are taking a bet on the relative performance of one against the other.
I´ll post shortly an idea of a long position that could be taken against TOL.