Updated from 11:40 a.m. ESTToll Brothers ( TOL) sent shivers through the homebuilding sector Tuesday, after the luxury-home vendor tempered its forecast for 2006, based on disappointing new order numbers in its just finished fourth quarter. Toll plunged 14% to $34. While Toll's high-end offerings can make it a poor barometer for the construction industry as a whole, investors nevertheless sold down the entire homebuilding sector Tuesday. The Philadelphia Housing Sector Index fell 5.4%. Even though Toll also posted healthy fourth-quarter sales figures, in which revenue jumped 39% year over year to $2.01 billion, investors clearly focused on the latest quarterly order numbers, which rose just 1% on a unit basis to 2,272 homes. Some analysts were projecting 15% growth in orders. On the company's conference call Tuesday afternoon, a few things stood out: demand has for the most part peaked for Toll's properties across the country, price increases are slowing down, and getting new homes built is becoming a more difficult process. Add it all up, and it's likely that quarterly earnings numbers will become rockier for Toll and possibly other homebuilders. On the call, Toll's management stressed that the fourth-quarter order shortfall was largely due to problems with getting new communities opened in time, primarily because of the regulatory process. Because of this delay, the company said it likely will reduce its earnings growth projections for 2006. Toll said regulatory pressures, nervous buyers and pricing issues could weigh on earnings growth. The company will give an update on final numbers when it announces earnings Dec. 8. Robert Toll, the company's chief executive, said on the call that whereas housing permit approvals used to take one month, now they're generally taking two to three months. The company expects to deliver 9,500 to 10,200 homes in fiscal 2006, down from its previous estimate of 10,200 to 10,600.
Towns across the country have "decided to slow down the growth of housing, and this is one of the last ways they can control it," Toll said. "I think that's the major reason for the slowdown." In one instance he cited, the health department in one area took longer than the company thought it would in approving a swimming pool at a project, which delayed the entire construction of the community. The community count issue is key because new orders drive future earnings. Toll expects its community count to be flat from the fourth to first quarter, left in check at 230 communities. Toll is targeting a community count of 265 by the end of October 2006. However, the regulatory delays raise the question of whether this goal can be met. When a question along these lines was posed during the conference call, Toll said the company has given its "best guesstimate." Besides the supply problem, there are also demand issues at the company, much of which management blamed on falling consumer confidence post-Katrina. On the call, CEO Toll said pricing increases before the hurricane were at "warp speed," increasing $5,000 or $10,000 every week. Now, any increases are taking three to four weeks to manifest themselves, he said, adding that the overall level of price increases is moving back to the average for the past decade. The amount of people looking at homes is also slowing down. "Traffic has been down for about a year compared to the prior year," Toll said. But over the past few months, traffic has been rather consistent, he added. As for the demand in the company's markets, Toll gave a rundown of every area. Dallas was the only area where demand improved post-Katrina. Every other market was either flat, slightly down, or experiencing a bigger slowdown. Demand is falling in areas like New Jersey, Northern California, north Florida, and Chicago, among others.
As a result of the news, on Tuesday morning Friedman Billings Ramsey analyst Craig Kucera cut his fiscal 2006 EPS estimate for Toll from $5.60 to $5.45, representing 16% year-over-year growth, compared with the previous 22% EPS growth estimate. Analysts, on average, had been expecting the company to earn $5.60 a share for the year ending next October. Other homebuilders sank in Toll's wake. Pulte Homes ( PHM) shed 8.8% to $37.81, and Meritage ( MTH) fell 11.1% to $58.36. D.R. Horton ( DHI) tumbled 9% to $30.60, while M/I Homes ( MHO) fell 10% to $41.99. William Lyon Homes ( WLS), which reports earnings after the market closes Wednesday, fell 10.8% to $116.80.