Toll Brothers posted a net loss of $93.7 million, -$0.59 per diluted share, for its fiscal second quarter, the company announced Tuesday morning. The loss beat Wall Street estimates of a loss of $0.87 per diluted share, which sent Toll stock (NYSE:TOL) up more than 4.5% to $21.91 in midday trading. The stock settled back to a 3% gain at $21.60 by market close.
Investors were heartened by news that Toll's net-debt-to-capital ratio at quarter's end was 22.7%, its lowest level ever, according to the company, down from 31.8% one year ago. Toll ended the quarter with more than $1.23 billion in cash plus more than $1.27 billion available on its bank credit facility, which matures in 2011.
In a research note to investors, David Goldberg of UBS, which has a "buy"rating on the stock and a price target of $27 per share, lauded Toll management for reducing SG&A to 12.4%, nearly two percentage points better than UBS' forecast and on its strong cash position. "We believe Toll is well positioned to weather this downturn and emerge stronger, given its unique land position and liquid balance sheet," Goldberg wrote. "We applaud management's continued discipline, which focuses on profitability over sales volumes, as we believe it will drive outperformance once conditions begin to stabilize."
There was no indication in Toll's earnings release of any kind of stabilization, however. In a statement, CEO Robert Toll called on Congress to enact a temporary tax break for home buyers, which he said would "create a sense of urgency" that would "bring buyers off the sidelines and into the market" and help stabilize home prices. Citing the ongoing disruption in the mortgage markets, he said, "Without stabilization of home prices, trying to address mortgage issues may be difficult at best."
He continued, "Demand continues to be weak in most markets as our clients worry about selling their existing homes or entering the market before prices stabilize. In this difficult market, we continue to develop incentive strategies, when appropriate, on a community-by-community basis, which has enabled us to continue to generate pre-write-off profits. Although this strategy has resulted in slower sales, we believe it has helped sustain the reputation of our communities and value for our home buyers."
Toll's fiscal second-quarter loss included pre-tax write-downs of $288.1 million, $85 million attributable to joint ventures. The loss was mitigated by $60.6 million in non-home building income, including $40.2 million from a condemnation judgment. The net loss for the first half of the fiscal year was $189.7 million, -$1.20 per share, including pre-tax write-downs of$533.6 million, $112.8 million of which was attributable to joint ventures.
Revenues for the quarter were $818.8 million, a 30% drop from the comparable quarter last year, with second-quarter gross contracts of 1,237, down 39% from 2007's second quarter, and the value of gross contracts falling 49% from last year to $730.5 million. The cancellation rate fell to 24.9% from 28.4% in the previous quarter but was up from 18.9% in the comparable quarter last year. After cancellations, net contracts were down 44% to 929 with a value of $496.5 million, down 58% from last year's fiscal second quarter.
Backlog value at quarter's end was down 50% from the same time last year to$2.08 billion and 13% lower than first-quarter-end backlog of $2.40 billion.
The average price of gross contracts in the quarter was $590,000, down from $711,000 in the same quarter last year and from $634,000 in this year's first fiscal quarter. The company attributed the lower price to "a combination of factors: higher incentives; a product mix which included a higher percentage of contracts from active adult and other lower priced communities; and fewer sales in high-priced markets such as California, where the market has slowed significantly, and Manhattan, where the Company is temporarily sold out of available inventory. "
Toll ended the quarter with 51,800 lots owned and optioned, down from 91,200 at peak at the end of 2006's fiscal second quarter, and 300 selling communities, compared to 315 at the end of the first quarter and peak of 325 at this time last year.
Michael Rehaut, home building analyst at J.P. Morgan, took a more critical view of Toll's second-quarter results, writing in a note to investors, "Toll continues to maintain a strong balance sheet and generate positive cash flow. However, orders remain highly challenged, and moreover, given our outlook for continued overall difficult conditions in the housing market over at least the next 2-3 quarters, we continue to expect large impairment charges for the industry and TOL."
Rehaut has a neutral rating on Toll stock and mainatains a negative stance on the home-building sector.