Could This Homebuilder Be a Good Long-Term Bet?

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When most homebuilders have been suffering losses, Toll Brothers' (NYS: TOL) 54% surge in its third-quarter net profits came in as a pleasant surprise, though it was primarily because of a tax benefit.

Toll might be yet another poor homebuilder hit by the housing downturn, but delving a little deeper gives us reasons to have faith in its potential in the long run.

The not-so-good numbers
Toll's revenue slipped 13% to $394.3 million, dragged down by a 14% fall in the number of homes delivered. Its cancellation rates also rose from 6.2% to 7.4% year on year.

In spite of falling revenue, Toll's net income rose to $42.1 million owing to that tax benefit of $38.2 million as compared to $26.5 million last year. But excluding the benefit, pre-tax income still rose from $0.8 million to $3.9 million.

The positives
Not everything about the luxury homebuilder's numbers was negative.

Toll's net signed contracts, for instance, rose 2% to $406.7 million. Also, their average price remained at $570,000, almost the same as last year's, indicating that Toll did not have to resort to cutting prices.

More importantly, the future business indicator -- backlogs -- has increased 9% in units. The projected future housing revenue is thus 8% higher at $1.02 billion. This sounds much better than a 1% slip in peer Lennar's (NYS: LEN) backlogs, a 23% fall in KB Homes' (NYS: KBH) backlogs, or even a 5% rise in NVR's (NYS: NVR) backlogs, all year on year in their respective second quarters. 

Going a little deeper
What I really like about Toll is its relatively healthy balance sheet as compared to peers.

Think of all those construction companies whose numbers have been stinky (read: slumping bottom line as well as top line), and who also hold high debts on books. For instance, KB Homes' second-quarter revenue plunged 27%, losses widened, and its total debt-to-equity ratio stands at 381.5%. PulteGroup's (NYS: PHM) profits swung to losses in its second quarter, and its debt-to-equity ratio is at 164%. Even a smaller player like Beazer Homes' (NYS: BZH) third-quarter losses more than doubled, and its ratio stands at a staggering 618%.

Comparatively, Toll has profits on its books, which rose this quarter, and its total debt-to-equity ratio is relatively lower at 62.8%. The company also has cash and marketable securities worth $1.18 billion.

Going even deeper, Toll's margins have now improved year on year in each of its last seven quarters. Its quarterly net income CAGR, which stood at -24.8% over five years, is now at a positive 54.2% over the past year. Toll's return on equity is at 6.5%, better than most other players.

The Foolish bottom line
I am not saying I am bullish on the housing sector currently. We all know we might still have a long wait before a visible recovery. But going by the books to find a longer term value, I think Toll could turn out to be the better of the lot once the sector starts improving.

What do you think?

At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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