Majestic Research

Bloomberg

Toll Says Second-Quarter Net Income Misses Forecast

By Brian Louis and Peter Woodifield
Published: May 09, 2007

Toll Brothers Inc., the largest U.S. luxury home builder, said second-quarter profit was lower than earlier forecast and a lack of buyer confidence amid the subprime mortgage crisis is thwarting the housing recovery.

Profit will be less than the $71.4 million previously projected, Horsham, Pennsylvania-based Toll said today in a statement. Sales slid 19 percent to $1.17 billion and the company will write down as much as $130 million for land, more than double an earlier estimate.

“Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets,” Chief Executive Officer Robert Toll said in the statement. “Given the current state of the market, we no longer expect to achieve the most recent quarterly and annual guidance we provided.”

Five of the largest U.S. homebuilders have reported profit declines or losses in the last quarter as the housing slump cuts demand. The failure of at least 50 lenders to consumers with poor or limited credit is also curbing sales and has made the spring selling season a disappointment, executives said.

Toll said that while fewer than 2 percent of its buyers use subprime loans, stricter lending standards following the collapse of several mortgage companies are making houses at all price levels less affordable.

Buyer Confidence Wanes

“This, in turn, can impact the entire housing food chain, including some of our potential customers’ ability to sell their existing homes,” Toll said in the statement. “This, coupled with a lack of buyer confidence, may have served to impede the glimmers of a rebound we had started to see in early February.”

Shares of Toll fell 1 cent to $29.20 at 9:36 a.m. in New York Stock Exchange composite trading. The stock lost 9.4 percent this year through yesterday, compared with a 14 percent drop for a Standard & Poor’s measure of homebuilding stocks.

Toll said it still expects to report a fiscal second- quarter profit. It didn’t provide a net income figure in today’s preliminary earnings statement. Toll will report full second- quarter earnings on May 24.

“The magnitude of the writedowns was kind of surprising,” John Tomlinson, an analyst at Majestic Research in New York, said in an interview. “You have to wonder how much more is coming the rest of the year.”

In February, Toll forecast second quarter profit of at least $71.4 million, or 43 cents a share. Analysts in a Bloomberg survey forecast net income of 45 cents. Net income for the current fiscal year may be between $240 million, or $1.46 a share, and $305 million, or $1.85, Toll said in February.

Revenue Sinks

Homebuilding sales declined to $1.17 billion in the three months ended April 30 from $1.44 billion a year earlier. Revenue was estimated at $1.1 billion, according to the average of 10 analysts surveyed by Bloomberg.

The company said the value of net contracts signed slid 25 percent in the second quarter to $1.17 billion. The value of the company’s backlog, or homes under contract and not yet sold, dropped 32 percent to $4.15 billion.

The cancellation rate was 19 percent, down from 30 percent in the fiscal first quarter and 37 percent in the fiscal fourth quarter.

“Demand remains weak and buyers continue to stay on the sidelines for a number of different reasons,’’ Tomlinson said. “Cancellation rates improved sequentially, but the orders overall remained weak.”

U.S. existing home prices are forecast to fall more than previously estimated because of the drop in subprime mortgage lending and stricter loan standards, the National Association of Realtors said on May 8.

The 2007 median price for an existing home likely will drop 1 percent to $219,800 from 2006, the Chicago-based association said. It projects the median price for new homes to fall $100 to $246,400, the first decline since 1991, from its previous estimate of a 0.4 percent increase.