Majestic Research

Reuters

Toll Bros. Profit, Forecast Better than Expected

By Ilaina Jonas
Published: August 22, 2006

NEW YORK, Aug 22 (Reuters) - Luxury home builder Toll Brothers Inc. on Tuesday said the slowdown in the U.S. housing market pushed its quarterly profit down 19 percent, but the results beat Wall Street forecasts and the company issued a better-than-expected outlook.

Toll issued a revenue forecast for its upcoming fiscal year that was slightly more optimistic than at least one Wall Street analyst had anticipated, and its shares rose 2 percent in morning trading.

“They beat expectations in the short term,” Majestic Research analyst John Tomlinson said.

Robert Toll, chairman and chief executive, attributed some of the softness in demand to speculators who snapped up homes as investments in 2004 and 2005 and now are unloading them.  He also cited home builders who constructed homes without first having a buyer.

“Builders that built speculative homes are trying to move them by offering large incentives and discounts, and some anxious buyers are canceling contracts for homes already being built,” Toll said in a statement.

The softer market, about a year old, was reflected in Toll’s results, which showed earnings for the fiscal third quarter ended July 31 fell to $174.6 million or $1.07 per share, from $215.5 million, or $1.27 a share, a year earlier.  Wall Street analysts on average had forecast $1.04 a share, according to Reuters Estimates.

The company said write-downs, predominantly from options for land that it decided not to exercise, cost it about 9 cents a share in the quarter.

Revenue dipped 1.3 percent to $1.53 billion.  Analysts were expecting $1.59 billion.  Third-quarter revenue and earnings reflect orders taken at least a year earlier.

For 2007, the Horsham, Pennsylvania, home builder said it expects to sell 7,000 to 8,000 homes, down about 15 percent from its previous forecast.  It expects an average price of $635,000 to $645,000 per home.

The projected sales and price translate into revenue of $4.9 billion to $5.7 billion, Banc of America Equity Research analyst Daniel Oppenheim wrote in a research note.  Analysts’ average forecast was $5.10 billion.

“On the surface, with them lowering their initial delivery guidance only 15 percent, (that) was a surprise to people...,” Majestic’s Tomlinson said.  “But I would caution that because the orders are what the orders are, it really doesn’t address the underlying demand.”

The company cut its earnings forecast for the current fiscal year, ending in October, to a range of $4.41 to $4.63 per share, down from a previously lowered forecast of $4.69 to $5.16.  Analysts’ average forecast is $4.40.

For the fiscal fourth quarter, Toll expects net income of $1.33 to $1.53 per share.

Earlier this month, Toll reported that new orders in the third quarter fell 47 percent to 1,443, while the value of those contracts sank 45 percent to $1.05 billion.

On Aug. 9, it said its cancellation rate in the quarter was about 18 percent, and cancellations were highest in last year’s hottest markets—Orlando, Florida; Las Vegas, Nevada; Phoenix, Arizona; and Palm Springs and Northern California.

Toll shares were up 58 cents to $25.35 on the New York Stock Exchange.  Since reaching a high in July 2005, the shares have lost 57 percent of their value, while the Dow Jones U.S. Home Construction Index, which measures home builder performance, is off about 46 percent.