HORSHAM, Pa. ( TheStreet) -- It should be difficult to disappoint The Street by a wide margin when you pre-announce earnings, but Toll Brothers ( TOL - Get Report) accomplished that feat on Thursday morning, missing the Street estimate by 22 cents, a shock that took a wrecking ball to Toll shares, which were down more than 6.5% in the early afternoon on slightly higher than average trading volume. Approximately 5.7 million shares were traded on Thursday versus an average daily volume of 5.2 million.

What a difference a few weeks makes, that is, in the case of Toll and the rest of the homebuilders.

By mid-November Toll had pre-announced, and its order numbers were a positive surprise that sent the homebuilding sector into a rally. Toll itself gained 16% on the pre-announcement and the sector as a whole gained 7% -- a rally that in retrospect was probably unjustified.

Some analysts, including Michael Widner, analyst at Stifel Nicolaus, believed the mid-November rally was unjustified from its inception. The issue now is just how bad the Toll final numbers will be for the sector as a whole, and whether it is going to lead to another prolonged slump for homebuilders.

Stifel Nicolaus' Widner thinks the short-term outlook for the sector is gloomy. "They've got an uphill battle for the next few months, facing normal holiday-related slow seasonality, and diminished returns on the extended tax credit. Realistically, it could be a few months before there is a good new data point, it could be March" he predicted.

Indeed, the fourth-quarter numbers that will be reported in February are never a boon to the industry as they reflect the typically weaker winter sales season. "You've still got to underweight the sector and we could see the stocks gradually bleed off over the next few months."

Toll's earnings specifically present a few distressing signs even for those bearish on the company, such as Widner: Toll lost $111.4 million in the fiscal fourth quarter. The loss of 68 cents a share was largely due to continued write downs on the value of its land holdings and staff reductions. In the year-ago quarter, which included a larger amount of write downs, Toll lost $78.8 million, or 49 cents a share. Analysts polled by Thomson Reuters were expecting a loss of 46 cents a share on revenue of about $450.1 million. Revenue for the quarter ended Oct. 31 fell 30% to $486.6 million from $691.1 million.

What was most disappointing to the Stifel Nicolaus analyst was that gross margins were at their lowest level in several years. He explained that part of the big positive that The Street saw in the preliminary announcement was the new order volume: analysts and investors were stunned at that, and yet, now the company reports a gross margin number at its lowest level in years.

"Toll had been talking about getting pricing power back, but these numbers suggest they achieved the higher order volume by slashing prices, so they generated volume, but at what cost?" Widner asked.

Net margins were also negative for Toll. Taking into account that existing impairments and a charge on debt repurchase that investors already knew about, the net margin weakness is in part caused by incentives and bonuses paid to sales agents. This means, "They are still losing per house," Widner noted.

He added that while the new order numbers combined by the tax incentive to existing home-buyers to trade up is expected by some investors to help Toll, he thinks that is an overdone logic.

Still worse, being bearish on Toll, Widner has a sell rating on the company, but even his projections for 2010 closings and projected average sales price are higher than the projections that the company provided with its earnings. "It's hard seeing a whole lot of positives there," he said.

For the sector as a whole, the Toll earnings follow the negative sentiment already sparked by disappointing earnings from D.R. Horton ( symbol). And as D.R. Horton represents the low-end, first-time home buyer end of the sector, while Toll represents the luxury market, with both offering big earnings disappointments, it seems like there is nowhere to raise a roof beam among homebuilders that will make money, at least for a while.

-- Reported by Eric Rosenbaum in New York.

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