Toll Outlook Still Murky

First-quarter profits are strong, but the company gives little guidance about prospects for next year.
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Updated from 7:38 a.m. EST

Toll Brothers

(TOL) - Get Report

posted a 49% rise in first-quarter earnings and forecast fiscal 2006 earnings in line with Wall Street's expectations. But investors nervous about future growth received little guidance about what 2007 will hold.

The Horsham, Pa., luxury-home builder earned $164 million, or 98 cents a share, for the quarter ended Jan. 31, up from $110 million, or 66 cents a share, a year earlier. Revenue rose 35% from a year ago to $1.34 billion. Analysts surveyed by Thomson Financial were looking for earnings of 92 cents a share on sales of $1.35 billion.

First quarter-end backlog rose 22% to $5.95 billion, and signed contracts of $1.14 billion declined 21% from last year's record first quarter.

"Based on strong demographics, restrictive land-approval regulations and our supply of 87,000 lots, we believe Toll Brothers is well positioned for growth. Over the next couple of quarters, however, we will continue to face tough comparisons with last year," said CEO Bob Toll in a statement. "In 2005, demand for new homes in many markets was propelled to unsustainable levels by speculative buying. We are now on the other side of that slope. Speculative demand has ceased and speculators are now putting their homes back on the market. The result has been more supply than demand in some regions."

The company said it expects to earn between $4.77 and $5.26 a share for 2006. The guidance is in line with the $4.96 First Call estimate, but slightly below Toll's December projection of $4.79 to $5.27 a share.

As far as 2007, the year has been in question ever since Toll said

in December that "these uncertain times" meant that its previous guidance of 20% earnings growth for 2007 might be wrong.

Toll didn't provide specific estimates for 2007 earnings or revenues during its conference call Thursday. Analysts currently expect Toll's EPS to drop to $4.73 in 2007. Margins are expected to compress at the company, as analysts forecast Toll's revenue will increase from $6.82 billion this year to $6.91 billion in 2007.

One caller on the conference call asked management whether revenue would increase from 2006 to 2007. "The answer is we think '07 should be better than '06 in terms of a whole bunch of things," Bob Toll responded.

But when later pressed how this improvement could be the case, given that

order trends of late have been declining in every market, Toll conceded that business still needs to pick up.

"If we don't have the orders pick up, then we won't have the success in '07 that we think that we'll have," Bob Toll said.

To boost sales, the company is embarking on an aggressive growth campaign, with 140 communities to be added this year, along with 100 closings. During the quarter, 17 new communities were opened.

Toll said its best-performing markets of late have been Phoenix; Denver; Prince George's County, Md.; and San Antonio (which all received "A" ratings from management), while the Washington, D.C./Northern Virginia market; Jacksonville, Fla.; and Austin all received "D" grades. The company also said its numerous condo projects surrounding Hoboken, N.J., have been selling very well.

Markets where overall home inventories are being heavily affected by speculative buyers looking to re-sell their houses included Washington, D.C., Orlando and Las Vegas (which is holding up better than the other two markets in terms of Toll sales), the company said.

Toll shares were up $1.05, or 3.2%, to $33.53 Thursday.