Toll Sees No Signs of Recovery

The mansion-builder again trims its home-closing targets for fiscal 2007.
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Updated from 9:46 a.m. EST

Toll Brothers

(TOL) - Get Report

failed to comfort those hoping for an imminent housing rebound, saying Tuesday that the market continues to decline and has not yet reached a bottom.

The homebuilder trimmed its fiscal 2007 home-closings forecast and said new orders plunged 57% in its latest quarter, as cancellation rates continue to rise. Still, because so much of the bad news is already priced into Toll's stock, its share recently were down a modest 5 cents to $28.

The company, reporting preliminary fiscal fourth-quarter data, said it will be hit by writedowns of $50 million to $100 million in the period, due to cutbacks in its land positions as housing markets continue to soften.

For the quarter ended Oct. 31, revenue fell 10% from a year ago to $1.81 billion, shy of the $1.83 billion Wall Street estimate.

On a conference call Tuesday, CEO Robert Toll blamed much of the decelerating demand around the country on a loss of confidence in homebuyers.

"They're on the sidelines," he said. "The primary cause of a lack of demand is a fear of buying a home that two weeks later is going to be priced less."

Shunning its previous stance, the company is now offering significant discounts to move homes in certain markets, Toll said.

Except for good results in certain areas -- like the New York City metropolitan market, Texas, the Carolinas and Denver -- the rest of the country's housing markets remain bad and some areas have gotten worse in recent months, Toll said.

The company's cancellation rate in the most recent period rose to 37% from 18% in the third quarter. Orlando, Fla., and Northern California represented the areas with the most cancellations.

The biggest reason for the cancellations in these two markets were a "whole bunch of investors that we didn't catch in our screening process and didn't realize we had in our communities, and that's why we have so much cancellation," Toll said.

Toll Brothers said it now expects to deliver between 6,300 and 7,300 houses next year. It originally expected to sell nearly 9,000 houses in fiscal 2007.

The company will provide earnings guidance for next year on its December earnings conference call.

Although much of the company's conference call was rather negative, Toll did give the positive scenario for how things will get better for the company.

Toll said that as more of the inventories burn off, there will be less discounting of homes, and consumer confidence will change (even if it's just minimally). At this point, "we'll see a much faster recovery than the markets expect," Toll said. This is partly because there have been fewer approvals of new homes over the past year, which helps with future supply.

Meanwhile, demand will continue to grow because of population growth and the growth in wealth, he said.

Toll also said the country's distress over foreign affairs and domestic politics might be spilling into the housing malaise. As well, the recent run-up in stocks might be hurting housing as a desirable asset class, he said.

Analysts, on average, expect earnings per share of $4.39 for fiscal 2006, down from $4.78 in fiscal 2005, according to Thomson First Call. Next year, earnings are expected to drop to $2.77 a share.

In a research note, Bank of America analyst Daniel Oppenheim said it may take some time for demand to improve for the company's stock of high-end homes.

"One year ago, Toll noted the slow sales activity," Oppenheim wrote. "As the trend has now lasted for more than a full year, we think the buyer psychology has turned more negative and would be surprised if it were to turn rapidly, especially given the continued pressure on prices from the excess inventory of homes for sale."

Another builder,

Beazer Homes

(BZH) - Get Report

, also indicated Tuesday that the housing market remains shaky. The company reported a 44%

drop in profits, citing lower levels of demand for new homes, significantly higher cancellation rates and increased discounting.