I love Robert Toll's characterization of the current status of the housing markets: "Fifteen months into the current slowdown," said the chairman and CEO of homebuilder Toll Brothers
Coming amidst still-sloppy housing start and permit numbers, Toll's results for the quarter were in line with expectations. The company recorded $1.81 billion in revenues for the quarter ended Oct. 31 -- the fourth quarter of its 2006 fiscal year -- compared with a record $2.02 billion a year earlier. Earnings for the quarter were $173.8 million, or $1.07 per share, down from $1.84 last year. The latter figure was a penny higher than analysts had estimated, but keep in mind that the company recorded $0.42 per diluted share in writedowns in the 2006 quarter.
Toll's most recent results were also affected by 585 cancellations during the quarter. That number, which was considerably higher than normal, and which in many cases related to would-be buyers' inability to sell their existing homes, essentially created 585 unintended "spec" units for the builder. And since Toll builds in the luxury segment of the industry, its spec homes may necessitate more creative marketing efforts than is typically the case in the industry.
Looking ahead, Toll's guidance for fiscal 2007 envisions net income of between $260 million and $340 million, or $1.58 to $2.08 per share. And the per-share earnings projection would compare to the $4.17 in diluted per-share earnings for fiscal 2006. At the same time -- and I hate to bathe Fools in accounting minutiae -- it should be emphasized that between $0.22 and $0.29 of per-share earnings likely will be shifted from fiscal 2007 to subsequent years as a result of a movement from "percentage of completion" accounting to the "completed contract" method. And given the current softness in housing, the company has included in its projections an estimate of $60 million -- nearly four times the norm -- for pre-tax land-related writedowns for 2007.
But as the market indicated on Tuesday, Toll Brothers' share price for now is clearly tied less to raw earnings numbers than to the place where Bob Toll's company is dancing. The company's shares increased $0.96 (or 3.01%) to $32.87 on the day, as investors were buoyed by the willingness of the head of a major builder to call a bottom for housing's recent declines.
In fact, the market may itself have seen this bottom even before Toll did. In a Foolish piece published Monday, I noted that some of the homebuilders have witnessed 30% share price increases just since July. It was time, I had to admit, to begin nibbling at some of the names in the group, including Toll, Centex
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