Toll Brothers Mitigates Pain

Although Toll didn't give earnings guidance for its fiscal 2007, the company said it expects to deliver 7,000 to 8,000 homes at an average price of $635,000 and $645,000 next year. That's down from this year's projected deliveries of 8,600 to 8,900 houses at $685,000 to $690,000.

Based on the order forecast, along with $450 million to $500 million in revenue from buildings accounted for under the percentage of completion method, Toll's projections suggest revenue of $4.9 billion to $5.7 billion for fiscal 2007. That range appears to "imply an uptick in orders in '07, something we're not yet ready to assume," wrote Bank of America analyst Daniel Oppenheim, who rates Toll a sell, in a research note Tuesday.

Toll's implied revenue forecast is in line with analysts' estimates. Wall Street projects that Toll's revenue will fall to $5.1 billion in fiscal 2007 from $6.2 billion in the current year. Analysts expect earnings will drop to $3.06 a share next year from $4.40 in fiscal 2006.

One thing Toll has going in its favor is that it was one of the first builders to talk honestly about the housing slowdown when it first began a year ago, says a hedge fund manager who invests in builders.

"Because Toll was candid and managed expectations early, they have less explaining to do now and they have easier comparisons, and they have a well-positioned balance sheet," the fund manager says.

Since the company has been so open about its difficulties, Toll's stock has underperformed the rest of the homebuilding sector over the past year. Now, the fund manager says, Toll could be ready to outperform.