Toll Brothers' release of its fiscal second-quarter financials landed with a thud on Wall Street; analysts were expecting a disappointing earnings report but were still concerned with the level of impairments taken by the company, which amounted to $119.2 million on a pretax basis.
Credit Suisse analyst Ivy Zelman, was, as usual, the most bearish of the home building analysts. She expressed concern over the company's plans to add to its land portfolio despite its existing nine-year supply and the possibility that the downturn could persist. In a research note, she wrote, "Despite reducing lot count by ~28% from its 2Q06 peak level of 91,200 lots, total inventory is actually up 3% over that time period...TOL's inventory turn ratio of 0.6 is the slowest in the group and may potentially open the door for additional impairments later in the cycle if market conditions languish longer than the company expects. While we credit TOL as being regarded as one of the best land buyers in the industry, we question the need to tie up more capital in land give the current uncertainty in the market and likelihood for further pricing pressures (both on home and land prices) in the coming quarters."
Wachovia Capital Markets' Carl Reichardt took a mixed view of Toll's numbers. "Sales pace and pricing trends have appeared to stabilize on balance over the last several weeks, but remain soft," he wrote in a research note. "TOL continues to indicate its preference for holding price and even hoarding well-located, low-basis land rather than liquidating it, pointing to its strong balance sheet (32% net debt-to-cap, $550mm in cash, $1.1B on its revolver) as rationale for its tactics. As such, we believe unit order growth will lag peers while margins remain above average."
Buck Horne of Raymond James & Associates noted that while "there were few surprises" in the release, "new order and customer traffic trends in Toll's segment of the market are still tracking down ~20% despite easier year-to-year comps; 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); 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."
Michael Rehaut of J.P. Morgan Securities wrote that "some signs of stabilization" were evident in Toll's numbers and in its subsequent conference call. "Specifically, while only two weeks since its 5/9 call, which featured more sober commentary during its market overview, TOL noted it was getting 'a little more confident' regarding the current environment based on recent sales trends. Additionally, it noted its sales pace projections by community for the next 12 months, which is reviewed on a weekly basis, have not been declining over the last several weeks, and that pricing has not deteriorated. While we believe overall housing trends remain choppy, we believe TOL's comments may suggest that conditions have not materially worsened over the last month, and continue to believe stabilization should occur over the next few quarters."
Toll Reported its earnings on May 24. For the three months ended April 30, net income dropped 79% to $36.7 million, or22 cents per share, from $174.9 million, or $1.06 per share, a year ago. The impact of the writedowns on an after-tax basis was $72.9 million, or 44 cents per share, compared with just $7.3 million, or 4 cents per share in the prior-year period. SEE COMPLETE EARNINGS RELEASE HERE. Second-quarter net signed contracts fell 25% to $1.17 billion from $1.56 billion a year earlier, to 2,031 contracts - before cancellations - in the latest period, a 14% decline. The cancellation rate was 18.9%, below the 29.8% rate posted during the first fiscal quarter but above the company's 7% average. Toll expects to deliver between 6,100 and 6,900 homes in fiscal 2007, with home building reveue of $4.26 billion to$4.88 billion. For the third quarter ending July 31, the company projects deliveries of between 1,400 and 1,800 homes and revenue of between $990 million and $1.28 billion.