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Toll Sounds Alarm Bells

Updated from 11:40 a.m. EST

Toll Brothers (TOL - Get Report) sent shivers through the homebuilding sector Tuesday, after the luxury-home vendor tempered its forecast for 2006, based on disappointing new order numbers in its just finished fourth quarter.

Toll plunged 14% to $34. While Toll's high-end offerings can make it a poor barometer for the construction industry as a whole, investors nevertheless sold down the entire homebuilding sector Tuesday. The Philadelphia Housing Sector Index fell 5.4%.

Even though Toll also posted healthy fourth-quarter sales figures, in which revenue jumped 39% year over year to $2.01 billion, investors clearly focused on the latest quarterly order numbers, which rose just 1% on a unit basis to 2,272 homes. Some analysts were projecting 15% growth in orders.

On the company's conference call Tuesday afternoon, a few things stood out: demand has for the most part peaked for Toll's properties across the country, price increases are slowing down, and getting new homes built is becoming a more difficult process. Add it all up, and it's likely that quarterly earnings numbers will become rockier for Toll and possibly other homebuilders.

On the call, Toll's management stressed that the fourth-quarter order shortfall was largely due to problems with getting new communities opened in time, primarily because of the regulatory process. Because of this delay, the company said it likely will reduce its earnings growth projections for 2006. Toll said regulatory pressures, nervous buyers and pricing issues could weigh on earnings growth. The company will give an update on final numbers when it announces earnings Dec. 8.

Robert Toll, the company's chief executive, said on the call that whereas housing permit approvals used to take one month, now they're generally taking two to three months. The company expects to deliver 9,500 to 10,200 homes in fiscal 2006, down from its previous estimate of 10,200 to 10,600.
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