Stay Away from Toll Brothers

Yesterday, Toll Brothers (TOL) reported a wider-than-expected loss of 68 cents a share. This was 22 cents worse than analysts were expecting. I still believe the homebuilder is facing too many headwinds. For the quarter, sales dropped 30%.

Until August, I had Toll Brothers rated as a Buy but I’ve downgraded it since. In September, I highlighted the stock in a focus on homebuilders. Here’s what I had to say:

There are initial signs of hope for this company. As year-over-year comparisons start to get easier, I expect much better numbers in the coming months from TOL. However, it’s still too early to put your money behind this company. It’s impossible to overlook the bad debt and other losses on Toll Brother’s balance sheet as a result of the credit crisis. Until these losses are digested, the company will continue to post results similar to the 2Q numbers we saw released in August–that is, Toll Brothers will be bleeding cash even if sales pick up. Steer clear of this home builder for now because it still has a lot of ground to make up.

The same holds true today. Toll Brothers is a Sell.

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