Home Builder Toll Brothers Cuts 2006 Forecast

NEW YORK – Luxury home builder Toll Brothers Inc. (TOL), which warned last month it plans to build fewer homes, on Thursday cut its profit outlook for the current year and put its forecast for 2007 in doubt, citing the slowing U.S. housing market.

The company also posted a better-than-expected 72 percent rise in quarterly earnings, but investors focused on the forecast, which weren't as bad as had been feared, an analyst said.

As telegraphed on November 8, Toll lowered its forecast for the fiscal year ending October 31, 2006, to earnings growth of nil to 10 percent, or $4.79 to $5.27 per share, instead of the 20 percent growth it previously expected. After last month's warning, Wall Street reduced its forecast for Toll's fiscal 2006 profit to $5.26 per share from $5.58, according to Reuters Estimates.

In late trade, Toll shares were up $1.11 cents, or 3.2 percent, at $35.41.

"People knew there was going to be relatively disappointing news coming out of Toll," said Michael Koskuba, analyst with Victory Capital Management, which sold its position in Toll after the company's warning last month. "Once the news was out, there was a bit of a relief that it wasn't greater"

Despite the stock's Thursday rise, Toll shares are down about 10 percent since the November warning.

The weakened outlook came a day after a profit forecast from rival Hovnanian Enterprises Inc. (HOV) disappointed Wall Street. Both companies cited a slower housing market and delays in getting building approval from municipalities that want to stem growth.

Robert Toll, chief executive of Toll Brothers, echoed what economists, analysts and other home building executives acknowledge: The U.S. housing boom is losing steam.

"It appears that the housing market is not as robust today as it was throughout 2004 and through the summer of 2005, although there is wide variation in local markets," as interest rates rise and homes sit on the market longer, said Robert Toll.

"Many believe the deceleration in price growth was inevitable as the increases of 2004 and most of 2005 were not sustainable and were fueled, in part, by speculation," he said.

Toll said markets such as Las Vegas and the west coast of Florida, remain "excellent." Reno, Nevada; Charlotte, North Carolina and Orlando, Florida are "good." However, Northern Virginia and Michigan are "poor."

Analysts and large, publicly traded home builders have said the companies' geographical reach, access to capital and efficiencies that come with size will allow them grab market share from smaller, private competitors and grow even in a down housing market.

But investors, who have driven down the Dow Jones U.S. Home Construction Index -- a barometer of home-building stock activity -- by 10 percent since June 30, don't seem to buy it, said BB&T analyst Jack Kasprzak Jr.

"They're priced like there's a severe cycle downturn in housing ahead," Kasprzak said, referring to the low price-to-earnings multiples of six to seven for most housing stocks. "Even if you're cutting earnings a little, that would be a surprise to investors down the road -- that there's still growth even at a slower pace."

Toll sees fiscal 2006 revenue of $6.65 billion to $7.25 billion and expects to sell 9,500 to 10,200 homes at an average price of $670,000 to $680,000 each.

For 2007, the company said it still expects record demand but given that these are "uncertain times, results could prove better or worse than the previous guidance we gave of 20 percent growth."

Toll issued its 2006 and 2007 outlook as it reported fiscal fourth-quarter profit of $310.3 million, or $1.84 per share, up 72 percent from $180.6 million, or $1.11 per share, a year earlier. The company posted revenue of $2.02 billion for the quarter, which ended October 31.

"If this is as tough as it gets, I'll make a deal with the devil," Toll said in a conference call with analysts.

Analysts' average forecast was $1.66 per share on revenue of $2.04 billion.

Toll shares are up 3 percent on the year but down 30 percent since June 30. Hovnanian shares are down about 1 percent on the year and off 25 percent since June 30.