If Toll Brothers’ Earnings Are So Strong, Why All The Debt?

Yellen Concerned by Housing Slowdown She Has Scant Power to Cure

The hesitant housing recovery has surprised and concerned Federal Reserve Chair Janet Yellen and her colleagues at the central bank. It’s not clear how much they can do about it.

You can read the rest of the Bloomberg News article here:  Yellen/Weak Housing Market

Toll Brothers reported their earnings for their FY second quarter ending April.   On the surface they reported headline promoting earnings which exceeded expectations.  To be sure, they were able to raise prices quite a bit, as their product appeals to the income/wealth demographic that is the primary beneficiary – as the Fed has shamelessly admitted – of the $4 trillion in fake wealth printed up by the Fed.

However, in glossing over the reported press release numbers (no 8-K yet), I began to smell a GAAP accounting rat.  As it turns out, Toll’s debt load during what was supposedly a “blow out” quarter ballooned up over 10% from $3 billion to $3.3 billion from the previous quarter.  More shocking was the 73% plunge in cash from the previous quarter, from $1.1 billion to $351 billion.  And inventory bubbled up by 25% from last quarter.

Qu’est-ce que c’est?  This clearly merits close scrutiny.  I plan on taking a hard look at Toll Brothers as a short-sale candidate.  If it looks like a great opportunity, I’ll make the report available in my research section (link above).  I made money shorting TOL in the housing bubble’s first go-around (not nearly as much as in Beazer, however).  But I shorted it near the end of the 1st bubble.  Now, TOL’s stock is much higher, debt and inventory has ballooned up, and new home sales are comp’ing at a rate that is 71% below the peak of the big bubble.

I smell possible blood…

3 thoughts on “If Toll Brothers’ Earnings Are So Strong, Why All The Debt?

  1. I don’t know about their financial statements. I know they build a lousy house. This was explained to me in great detail by a small home builder with an impeccable reputation here in central Massachusetts he went through all the ways that they use thinner materials, fewer studs, cheaper plaster etc etc. Toll first came into this area about 10 years ago. So they had no local reputation and like all purveyors of merde they profited from everyone’s ignorance of what a shitty house they build.

    1. Love it. Sell out of the money calls short on it if it has calls on it. Big bounces like this week are great times to either start a position or short OTM calls. Leave yourself room to add to your position if go short here and it moves against you. This sector is volatile.

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