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Toll Trims Estimates Again

Nicholas Yulico

Homebuilder Toll Brothers(TOL Quote) reported a 48% plunge in third-quarter new orders and again cut its delivery forecast for the year, as the company blamed oversupply for the weak U.S. housing market.

Toll, the country's largest luxury-home builder, also warned that it is walking away from certain land option contracts, which will results in write-offs of deposits. The company said it will quantify this impact when it reports earnings later in August.

Toll shares recently were down $1.30, or 4.9%, to $25.28, as the entire homebuilding sector moved lower. Shares of Ryland (RYL Quote) were down $2.38, or 5.6%, to $40.50; Hovnanian (HOV Quote) declined $1.29, or 4.7%, to $26.25; and KB Home (KBH Quote) shed $1.61, or 3.6%, to $42.84.

Toll said its revenue for the quarter ended July 31 fell to $1.53 billion from $1.54 billion a year earlier. Its backlog of homes sold but not yet delivered dropped 13% at quarter-end to $5.59 billion. Total new contracts, including those for homes sold in joint-venture communities and high-rise condo towers, totaled 1,473 units, down from 2,857 a year earlier.

Based on its current backlog, the company expects to deliver between 2,500 and 2,800 homes in the fourth quarter, compared to its previous guidance of 2,900 to 3,300 deliveries. For its full 2006 fiscal year, the company believes it will deliver between 8,600 and 8,900 homes.

In May, Toll trimmed its full-year delivery forecast by 200 houses to a range of 9,000 to 9,700.

In a research note, Bank of America analyst Daniel Oppenheim, who rates Toll a sell, says he expects the company to eventually lower its fiscal 2006 earnings guidance once again. The company's current forecast calls for earnings per share of $4.69 to $5.16.

Oppenheim cut his 2006 earnings estimate for the company to $4.20. Next year, he expects EPS of $2.25.

According to Oppenheim, the options write-offs have the potential to be significant. He estimates Toll has purchased options on about 45,000 lots since the end of fiscal 2004, with an estimated option deposit of $10,000 per lot, or about $450 million total.

In a prepared statement, Toll Brothers CEO Robert Toll said the current housing slowdown first manifested last September and is "somewhat unique."

"It is the first downturn in the 40 years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors," he said.

"Instead, it seems to be the result of an oversupply of inventory and a decline in confidence: Speculative buyers who spurred demand in 2004 and 2005 are now sellers; builders that built speculative homes must now move their specs; and nervous buyers are canceling contracts for homes already under construction. The resulting excess supply has exacerbated the drop in consumer confidence, which first appeared last September, that was already a drag on new-home sales."

The company also said it saw an increase in its cancellation rates in a number of markets, including Orlando, Fla.; Northern California; Palm Springs, Calif.; Las Vegas; and Phoenix.

Also on Wednesday, fellow builder WCI Communities(WCI Quote), which mainly focuses on the Florida condo market, said its earnings fell 68% in the second quarter to $22.7 million, or 52 cents a share. The results were well short of Thomson First Call's average analyst estimate of 73 cents.

WCI also cut is full-year earnings guidance to $2.75 to $3.25 per share. Analysts currently expect earnings of $3.59 a share. WCI shares recently were down 54 cents, or 3.4%, to $15.37.