Toll Keeps Outlook Veiled

The homebuilder's second-quarter earnings beat targets, but investors got little insight into fiscal 2007.
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Updated from 9:41 a.m. EDT

Toll Brothers

(TOL) - Get Report

shares got a lift Tuesday after the company's second-quarter earnings topped expectations, though the builder trimmed its full-year earnings targets, citing weakness in Detroit and a general softness in demand.

Toll also failed to provide any guidance for fiscal 2007 -- and investors didn't get much anecdotal evidence on the company's conference call to get a feel for what the future holds for the homebuilder.

The Horsham, Pa., company reported net income of $175 million, or $1.06 a share, for the quarter ended April 30, up from the year-ago $170 million, or $1 a share. Revenue rose to $1.44 billion from $1.24 billion a year earlier. The latest quarter included a writedown of $12 million, or 4 cents a share, tied to weakness in the metropolitan Detroit area.

Analysts polled by Thomson First Call were looking for a profit of $1.03 a share on revenue of $1.47 billion. Toll shares rose 2% to $27.43 Tuesday.

The report comes two weeks after Toll trimmed its year-end delivery forecast by 200 houses, to a range of 9,000 to 9,700. The lower delivery forecast, along with increased material and labor costs, prompted the company to reduce its fiscal 2006 earnings target to $4.69 to $5.15 a share, from the previous $4.77 to $5.26. Analysts expected earnings of $4.85 a share for the year ending in October.

In a statement, CEO Robert Toll said, "Demand, while obviously diminished, has not disappeared. We believe many customers currently feel a lack of urgency to purchase due to their uncertainty over the direction of home prices: This has contributed to keeping many potential buyers on the sidelines."

Investors will get more clarity on the state of the housing market later this week. The Commerce Department reports new-home sales data Wednesday, and the National Association of Realtors reports sales figures for existing-home sales Thursday. Inventory levels will be closely watched, since builders -- especially Toll Brothers -- are facing stiff competition from the growing supply of available homes for sale.

Toll Brothers hasn't given any guidance for fiscal 2007 since it pulled its previous forecast in December. Management on the conference call said the company will give a forecast for the coming year when it reports third-quarter earnings.

In a research note Tuesday, Daniel Oppenheim, an analyst with Bank of America, reiterated his sell rating on Toll Brothers.

"We remain concerned that supply has not slowed sufficiently to result in improving inventory levels ... and expect that the slowdown may impact the market for longer," Oppenheim wrote.

On its conference call, Toll said the Northern Virginia market has improved, but it still is slow compared with strength in the Maryland suburbs. As well, Phoenix is getting softer, Toll said. In Florida, the eastern coast has seen better results, but the western coast has "nosedived tremendously" in the last four months, Toll management said.

Meanwhile, there has been

growing talk that the land on builders' books may be undervalued because it is stated at cost. Toll said that the land it controls was purchased anywhere from five to seven years ago, and that about 20,000 of its 91,000 lots under control were bought in 2005 or later. However, the company declined to say how much its land is worth above the stated book value.

Going forward, the pressing issue for Toll is whether its ramp-up in new selling communities will help offset the slowing sales at its existing communities. Toll, on the call, said it expects its year-over-year order numbers to turn positive in the fourth quarter, helped by the new openings. The company expects to end fiscal 2006 with 295 selling communities, compared with 230 in 2005.

Another issue will be how Toll can keep its margins in check. In the quarter, the company's net margin dropped to 12.1% from 13.8% a year earlier, partially dragged down by the land impairment charges. Over the next two quarters, selling, general and administrative expenses will rise due to upfront costs associated with opening new communities, the company said.