House prices hit an eight-year low in March. Does this mean prices are ready to rise from here and you should buy stock in housing giant Toll Brothers (NYSE:TOL)?
The data suggest that we have not reached a bottom. As of March, The S&P/Case-Shiller Index of property values in 20 cities fell 3.6% from a year ago. That was both the biggest year-over-year decline since November 2009, and its lowest level since March 2003.
And those prices could keep falling. Foreclosures create a supply overhang that could push prices lower and keeping builders away. In March�2011, about�1.8 million houses were at least 90 days delinquent, in foreclosure or bank-owned. This so-called �shadow inventory� is estimated at 3.87 million previously owned�properties on the market at the end of April.
Not only is there too much supply, but many factors are crimping demand. Among these are 9% unemployment and tighter lending conditions. Paul Dales, a senior U.S. economist at Capital Economics Ltd. in Toronto told Bloomberg, �I wouldn�t be surprised to see prices continue to fall this year and maybe into next year.�
This housing disaster is not much of a surprise. In March 2007, I predicted a depression was on the way — 16 months before the collapse of Lehman Brothers. How so? Income inequality had hit a record not seen since 1928, the year before the Great Depression and middle class consumers were borrowing a record $2.4 trillion trying to keep up. Approximately $1.3 trillion worth of subprime mortgages had been issued and 47% of those were so-called liar loans. To those who claimed that nobody saw this coming, I count myself among the�nobodies.
The question for investors is whether all this gloomy news on housing is already factored into the prices of housing stocks. If so, perhaps this is a time to buy them.
Let’s look at Toll Brothers. It builds single-family detached and attached houses in so-called “luxury residential communities.” It caters to a variety of customer segments, including�move-up, empty-nester, active-adult, age-qualified and second-home buyers in 19 states of the U.S.
In its most recent quarter, its financial results were not as bad as expected. For the quarter ended April 2011, its loss narrowed to $20.8 million, or 12 cents a share, from $40.4 million, or 24 cents a share, a year earlier. Revenue rose�about 3% to $319.7 million. And Toll Brothers raised by 4.5% its�estimate of the low end of the range�of the number of houses it would deliver in fiscal 2011 to 2,300, while keeping the high end at 2,800, according to Reuters.
Is now the time to add Toll Brothers to your portfolio? To think about that, we can look at its price-to-earnings-to-growth (PEG) ratio � a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company�s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.
Based on its PEG of 0.04, this stock is a screaming buy. It sports a P/E of 59 but its earnings are forecast to grow 1,430% to 45 cents a share in 2012. Unfortunately, Toll Brothers has been missing its earnings forecasts substantially — by an average of about 23% in the last two quarters. But that amounted to a loss that was about 2 cents a share worse than forecast. If Toll Brothers misses its 2012 forecast by that much, its PEG would still be very low.
With Toll Brothers stock down 57% from its June 2005 high of $51 but now up about 21% in�the last six months, it looks to me like Toll Brothers may have more upside than downside ahead.
Peter Cohan has no financial interest in the securities mentioned.
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