Over the last five years, shares in luxury homebuilder Toll Brothers (TOL) have risen 89%. I believe the firm faces several headwinds, and the bell is about to toll for the bulls.
Toll Brothers has been a huge beneficiary of low interest rates and the strong luxury-home market. In fiscal 2013, the company reported revenue of $2.6 billion. Wall Street estimates revenue will be $5.1 billion in fiscal 2016, which is an increase of almost 92% in just 3 years. But I think cracks are beginning to appear in the company's strategy.
Toll faces a difficult environment, going forward, as a result of the strong dollar. According to data from the National Association of Realtors, Chinese buyers bought approximately 12,000 homes in California (or about 35% of all homes in California) in the 12 months to March 2015. These buyers were especially active in San Francisco and Orange County. Toll Management has said 10% of its buyers are foreign nationals. According to analyst estimates, 46% of Chinese buyers who bought homes from Toll Brothers bought in California. With the recent devaluation of the Chinese currency, it has become more expensive for Chinese buyers to afford a Toll Brothers home.
In addition, the company's City Living unit is building luxury condos in New York City for between $2 million and $15 million. According to the company, approximately 13% of its New York buyers are Chinese.
According to Bloomberg, the market for high-end condos in New York City is slowing. Condos in the Toll Brothers 1110 Park Avenue project are priced between $10 million and $15 million -- and are exactly the type of units that are experiencing a slowdown.
Toll Brothers generates about 42% of revenue from California and its City Living division. In other words, 42% of the company's revenue seems to be slowing.
A number of analysts believe the company's stock is cheap, based on historical comparisons or versus to the rest of the industry, but it seems to me that Toll Brothers' revenue is in the process of hitting a peak, for this cycle.
If I'm right, the decline in Chinese buyers will slow Toll's revenue growth figures just enough to keep the stock looking cheap. But for bullish investors in the stock, I think the bell is about to toll.