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Toll Brothers Falls Most Since 2008 as Profit Lags Estimate

FEB 21, 2013 10:27am ET
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Toll Brothers Inc., the largest U.S. luxury-home builder, tumbled the most in four years after reporting fiscal first-quarter earnings that trailed analyst estimates and projecting narrower margins.

Net income for the quarter ended Jan. 31 was $4.4 million, or 3 cents a share, compared with a loss of $2.8 million, or 2 cents, a year earlier, the Horsham, Pa.-based company said in a statement. The average of 16 analyst estimates was for earnings of 10 cents a share, according to data compiled by Bloomberg.

Toll’s biggest market is from Boston to Washington, where new-home sales have lagged behind growth nationwide amid rising foreclosures in the area and threats of federal budget cuts. The company delivered 746 homes in the quarter, about 100 fewer than analysts projected, said Robert Wetenhall, an analyst at RBC Capital Markets LLC in New York.

“The Street thought they would deliver 850,” Wetenhall said in a telephone interview. “Expectations for Toll’s operating performance appear to be ahead of fundamentals.”

Toll fell 9.1% to $33.56 in New York trading, the largest one-day decline since December 2008. The Standard & Poor’s Supercomposite Homebuilding Index lost 6.7%, the biggest drop since June 1.

“I think there was a bit of an overreaction,” CEO Douglas Yearley Jr. said in a Bloomberg Television interview after the market closed. “We picked a bad day to report with a lot of other things going on.”

Builders broke ground on new homes in January at an annual rate of 890,000, the Commerce Department reported. That was less than the 920,000 average economist estimate and down from a revised pace of 973,000 in December

“We believe the decline in homebuilder shares pertains to below-consensus housing starts and earnings guidance causing forward expectations to moderate,” Jade Rahmani, an analyst with Keefe, Bruyette & Woods Inc., wrote in a note from New York.

Builders in the Northeast had the lowest confidence level of any U.S. region this month, according to a National Association of Home Builders/Wells Fargo index. The national gauge unexpectedly dropped from a six-year high.

Toll’s first-quarter revenue rose 32% to $424.6 million, compared with the average analyst estimate of $503.6 million. Deliveries increased from 564 a year earlier. Net signed contracts climbed 49% to 973 homes with a value of $614.4 million.

The average price of homes delivered fell to $569,000 from $571,000 a year earlier. Average prices were down because year-earlier sales included more New York City condominiums, which cost more and have higher profit margins.

The builder expects margins to drop 100 basis points, or 1 percentage point, in the second quarter from the previous three months, before the company is able to deliver homes with higher prices and bigger profit margins later this year, CFO Martin Connor said during a conference call with investors.

Toll’s gross margin of 18.7% for the first quarter missed analyst estimates, Adam Rudiger, an analyst with Wells Fargo & Co. in San Francisco, wrote in a note to clients. Selling and administrative costs relative to sales were higher than his estimate.

“Gross margin is not likely to expand, given mix issues,” said Rudiger, who has a market weight, or hold, rating on Toll shares. “We also believe it is unlikely that Toll will surprise to the upside in a significant way on revenue in 2013, given the slower backlog turnover and longer cycle times than peers.”

Toll Brothers, best known for its large single-family houses, has diversified into investing in distressed real estate and developing urban high-rise condos, apartments and dormitories as Yearley seeks steadier revenue through housing booms and busts. The company has a pipeline of sites for rental apartments totaling about 4,000 units, as well as two student-housing projects, Yearley said in the statement.

Toll Brothers raised prices at about 60% of its communities this year, Yearley said on the conference call.

It takes the company eight or nine months to deliver a new home, about twice the time of other public builders, which means Toll will take longer than its peers to recognize revenue from higher-cost homes, Yearley said.

Toll Brothers shares have gained 40% in the past 12 months, compared with a 57% advance in the S&P home builders index.

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