'We may be seeing a floor,' Toll CEO says
Builder's 2007 profit outlook below forecasts, but housing bottom seen
By John Spence & Steve Goldstein, MarketWatch
Last Update: 11:11 AM ET Dec 5, 2006
BOSTON (MarketWatch) -- Luxury home builder Toll Brothers Inc. on Tuesday said next year's annual profit will likely fall substantially from the recent boom years as the housing market continues to unwind, but also raised hopes that it's seen a bottom as buyer traffic improves in some markets.
Revenue dropped to $1.81 billion from $2.02 billion, but profit topped consensus forecasts by a penny a share. Analysts polled by Thomson First Call had expected fourth-quarter earnings of $1.06 a share. Toll shares rose 3.7% to $33.08 in late-morning action Tuesday.
Excluding 42 cents in write-downs, the company said it would've earned $1.49 a share. The Horsham, Pa.-based company said in response to the housing pullback, it's renegotiating many of its land positions controlled by options.
But the company also raised hopes that the tide may be turning.
"Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom, or slightly above," said Chief Executive Robert Toll in a statement. The CEO was among the first earlier this year to warn the housing downturn could end up being more drawn-out than expected.
He said the Washington, D.C., suburbs of Northern Virginia, the first market in which Toll Brothers saw slowing growth, seems to have stabilized, although at levels much lower than it enjoyed a few years back. And across the river on the Maryland side of the nation's capital the market also appears to be stabilizing, the CEO noted.
Still, the firm projected next fiscal year's net income will fall to between $260 million and $340 million, or $1.58 to $2.08 a share.
Profit is expected to be hurt by estimates of a $60 million land write-down and by a change in accounting treatment that will shift 22 cents to 29 cents a share in earnings to subsequent years. The accounting change is to reflect the probability that "percentage of completion" accounting will be used, Toll said.
Toll's 2007 outlook was below Wall Street's estimate of $2.30 a share. In fiscal 2006, Toll earned $687.2 million, or $4.17 a share. In 2005 at the end of the housing boom, it delivered a record $806.1 million in profit.
Cancellations up
Toll expects to deliver home-building revenues between $4.34 billion and $5.1 billion in fiscal 2007, down from $5.95 billion in fiscal 2006. It expects to deliver between 6,300 and 7,300 homes.
Last month when it reported preliminary quarterly results, Toll said its orders fell 57% from a year earlier as its cancellation rate rose to 37%. It saw 585 cancellations for the fiscal fourth quarter, a record. See previous story.
"With these cancellations creating unintended specs, we could face increasing margin pressure as we seek to move these homes," said CEO Toll in the earnings release Tuesday. A "spec" is the industry's jargon for speculative homes, or those built without a contract.
The company did, however, lift its estimate for homes it expects to deliver in the first quarter to between 1,600 and 1,900 homes, up from its previous forecast of 1,500 to 1,800 released in November.
The increase is "likely the result of having more success in selling spec homes than expected," wrote Banc of America Securities analyst Daniel Oppenheim in a research note Tuesday.
Upcoming catalysts for the stock are further improvements in home affordability, traffic and construction discipline from the builders, while interest rates remain "the wild card," said Oppenheim, who rates Toll shares neutral. The analyst recently upgraded Toll and several other home-builder stocks on improving signs for the housing market, although he cautioned the beaten-down sector's recovery would likely be uneven.
Rick Murray at Raymond James & Associates in a report to clients Tuesday said Toll's $60 million estimate for fiscal 2007 write-downs "may be optimistic." The company's 2006 net income included pre-tax write-downs of $152 million.
"While management noted the company may be seeing some stabilization in their Washington D.C., markets, it also noted that the data have been choppy," Murray wrote.
"We would suggest that given the recent turnover in government as a result of mid-term elections, some near-term stabilization would not be totally unexpected, though we remain skeptical that the Washington D.C. market (or anywhere else in the country) has reached bottom," the analyst cautioned.
John Spence is a reporter for MarketWatch in Boston.
Steve Goldstein is MarketWatch's London bureau chief.
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