Toll "A Little More Confident"

By DEBORAH YAO

PHILADELPHIA - Government data showing an unexpected surge in new home sales weren't much comfort to luxury homebuilder Toll Brothers Inc., which reported a 79 percent drop in second-quarter profits Thursday.

The Commerce Department reported that sales of new single-family homes jumped 16.2 percent in April - a 14-year high - to a seasonally adjusted annual rate of 981,000 units. Economists were expecting just a 0.2 percent gain. However, the median price of a new home dropped by the largest amount on record.

Economists were pleasantly surprised by the showing in April, the start of the home-buying season, but remain cautiously optimistic because the surge in demand seems to have been driven by price cuts instead of more sustainable factors like consumer confidence.

Shares of Toll Brothers reflected this dichotomy, initially rising by as much as 4.6 percent before falling back. The stock closed 30 cents higher at $30.07 on May 24.

Other homebuilders also gave up their gains. The Philadelphia Housing Sector Index, which tracks housing stocks, was down after an early rise.

"What you're seeing is the blue-light special," said Pat McPherron, an economist with Moody's Economy.com. "The only way this market is going to move is by price-cutting." McPherron pointed to the large inventory of unsold homes and rising mortgage delinquencies as problems for the market.David Wyss, chief economist at Standard & Poor's in New York, expects home sales to bottom out this summer and home prices to follow suit in early 2008 before staging a recovery.

But he said he might have to move up his projections because of the surprisingly large jump in home sales for April.

"We may be already be past the bottom," Wyss said. "We'll just have to wait and see."

Robert Toll, chief executive of Toll Brothers, was cautious. In a conference call with analysts, he said he's "a little more confident (about housing), but I would emphasize 'a little.'"

In the second quarter, Toll Brothers reported net income of $36.7 million, or 22 cents per share, down from $174.9 million, or $1.06 per share, a year ago. Revenue fell to $1.17 billion from $1.44 billion a year ago. SEE COMPLETE EARNINGS RELEASE HERE

Analysts surveyed by Thomson Financial were looking for profit of 25 cents per share on revenue of $1.12 billion.

The latest quarter includes writedowns of $72.9 million, or 44 cents per share. Excluding those one-time items, the company would have earned 66 cents per share in the latest quarter, compared with $1.10 per share last year.

Writedowns come from homes and property that Toll Brothers can no longer sell at a profit. If the company pays for the right to acquire land at a future date but decides not to build on it, Toll Brothers includes it among the writedowns.

The company said second-quarter writedowns were concentrated in Illinois, Michigan, California, Arizona and Florida.

Second-quarter net signed contracts fell 25 percent to $1.17 billion. The company signed 2,031 contracts, before cancellations, in the latest period, a 14 percent decline year-over-year.

Joe Snider, an analyst with Moody's Investors Service in New York, noted that Toll Brothers has managed its debt such that interest payments don't take as heavy a toll on earnings as on other homebuilders, he said."They generally have the highest margins in the homebuilding industry,"Snider said.

Last month, Pulte Homes Inc. posted a quarterly loss while D.R. Horton Inc.said its earnings fell by 85 percent. Centex Corp. saw a 49 percent drop in profits and called the housing downturn one of the most difficult slumps in25 years.

Looking ahead, Toll said it expects to deliver between 6,100 and 6,900 homes in fiscal 2007 and produce total home-building revenue between $4.26 billion and $4.88 billion for the full year.

For the third quarter ending July 31, the company expects to deliver 1,400 to 1,800 homes and produce home-building revenue between $990 million and$1.28 billion.

Buck Horne, an analyst with Raymond James & Associates, pointed to better-than-expected margins from homebuilding operations at Toll as a positive. But, in a research note, he wrote, "While there were few surprises in the release given the pre-announcement and conference call from May 9, we would highlight several key points from today's release: 1) despite comments from certain government officials and a surprising headline in April new home sales data - new order and customer traffic trends in Toll's segment of the market are still tracking down ~20% despite easier y/y comps; 2) international economic growth and commercial construction demand has kept prices for building materials high, leaving minimal cost savings at the end product for Toll Brothers (~$1,000-3,000 per house by management's estimate); 3) implicit in Toll's earnings guidance (or lack thereof), we believe even more land-related charges are coming in 2H07, despite $377 million of cumulative write-downs this cycle.

"The bad times may not be behind us yet, but it could be," Toll said. "You never know."

Publication date: 2007-05-24

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