Bell May Toll for Shorts

The homebuilder's history suggests those betting against strong earnings could be in for a shock.
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Will

Toll Brothers

(TOL) - Get Report

surprise again when it issues earnings Thursday morning? History says it will, and if it does, the heavy short interest in the homebuilder could drive up its stock.

The short interest in Toll is about 20% of its float. That amounts to 4.64 days to cover and possible bad news for short-sellers given the company's earnings history.

"The odds are against the shorts, that's why you

saw some covering," says Lawrence Horan, an analyst with Janney Montgomery Scott who rates the company buy. His firm does not have an investment banking relationship with Toll.

Toll Brothers jumped 4.3% to $50 on Wednesday while the Philadelphia Stock Exchange Housing Sector Index gained 0.9%. The sector was helped by government data that said new-home sales rose 6.5% in July to record levels, even though inventories are increasing. The stock is up more than 40% this year.

Toll Brothers has beaten estimates for the past nine quarters, according to Thomson Financial. In its fiscal second quarter, the company beat analyst estimates by 12 cents, reporting EPS of $1.01.

The key variable from quarter to quarter is the firm's operating margin, which continues to improve because of booming home-sale prices. In the second quarter, the company's margin increased 300 basis points from the first quarter and 600 basis points from a year earlier.

Earlier this month, Toll Brothers preannounced certain third-quarter results. The company said its third-quarter homebuilding revenue will be the highest of any quarter in its history, rising 55% year over year to $1.54 billion. Third-quarter contracts totaled $1.92 billion, up 19% from last year. The company's backlog was $6.43 billion, also the highest of any quarter. Toll Brothers said it remains on track to hit net income growth of 70% in fiscal 2005. The company expects net income growth of 20% in fiscal 2006.

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For the current quarter, Wall Street on average is expecting the company to earn $1.19 per share, according to analysts polled by Thomson First Call.