Toll Finally Rolls Over

To better serve as an informed reporter for my Foolish friends, I recently toured, and even stayed in, a Toll Brothers (NYSE: TOL) community near the company's headquarters in suburban Philadelphia. The luxury builder turns out an extremely attractive home, far larger and more sumptuous -- and more expensive -- than what most of its peers offer.

But Toll's desirable niche among builders didn't help it much in the quarter that ended in October, the final period in its 2007 fiscal year. In that period, the company recorded its first-ever loss -- a negative $81.8 million on the net-income line, for $0.52 a share. Just a year ago, in what now seems like another millennium, Toll earned $173.8 million, or $1.07 a share. The most recent quarterly results were clobbered by impairments and writedowns totaling a pretax $314.9 million.

Early on, amid the first pain that beset the homebuilding industry, I believed that Toll's luxury-builder status would permit it to be among the first to recover from the miseries now hammering the entire group. Indeed, its 7,023 homes delivered during the past year carried an average price approaching $700,000, a level well above the average for such other big builders as Lennar (NYSE: LEN), D.R. Horton (NYSE: DHI), Pulte (NYSE: PHM), and Ryland (NYSE: RYL).

But the nation's housing and mortgage maladies will likely drag Toll down further in fiscal 2008, to the point where management, while unwilling to forecast earnings, believes that it will deliver between 3,900 and 5,100 homes, at an average price in the $630,000 to $650,000 range. However, as management also pointed out when it released the quarter's results, the company ended the October period with $900 million in cash, more than $1.2 billion available under a credit facility, and its historically lowest net debt-to-capital ratio.

Nevertheless, despite its obvious strengths, Toll clearly continues to operate amid declining circumstances. Exactly a year ago, in announcing results for the quarter that ended in October 2006, CEO Bob Toll said he believed the company was "dancing along the bottom."

Like the rest of us, however, he couldn't have suspected the extent to which the mortgage markets would implode in 2007. But they did so, and the government's latest efforts to aid sinking subprime borrowers won't be a panacea for the range of difficulties that have crippled home lending. Until housing circumstances change appreciably, I'd be reluctant to touch Toll's shares with a 40-foot 2-by-4.

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