Toll’s Strong Earnings a Good Sign for Homebuilding Sector

Luxury homebuilder Toll Brothers reported little sign of a housing slowdown yesterday as the company’s fiscal second quarter earnings doubled and the company raised projections for fiscal 2005 and 2006.Its strong earnings and bullish outlook sparked intense investor interest in the homebuilding sector yesterday. Homebuilding stocks rose across the board, making the group the biggest gainer among the 100 Dow Jones indexes with a 3.8% average increase.The Horsham, Pa., company reported revenue of $1.25 billion, up 52% from $819.5 million a year ago. Net income rose to $170.1 million, or $2.01 a share, from $72.4 million, or 89 cents a share, a year earlier. The results easily exceeded the mean estimate of $1.79 a share reported by Thomson First Call.Fatter profit margins, lower-than-expected selling, general, and administrative expenses, and a lower tax rate drove the higher-than-expected results, said UBS analyst Margaret Whelan, in a note.Gross profit margins expanded 400 basis points to 32.25% from 28.2% a year ago.Results “were better than expected,” said Raymond James analyst Rick Murray. “We were forecasting [margins of] 31% and they came in at 32.25%,” he said. Higher home prices propelled much of the margin expansion as homebuyers appeared to increase the number of options on their homes, said Mr. Murray.The company raised earnings guidance to 70% growth in fiscal 2005, from previous estimates of 60% growth, and projected an earnings increase of 20% in fiscal 2006.Toll’s bullish outlook stems from its robust orders and backlog in the quarter. Orders rose 23% despite some weather-related construction delays in certain markets, such as Arizona, Las Vegas, and Washington. Its backlog stood at 8,561 units valued at $5.87 billion, up 38% from 6,211 units valued at $3.73 billion.The one chink in the company’s earnings armor was the weakness seen in California, where orders fell 51%. The company said it sold out of inventory faster than expected, which is why new communities were not open to sell more homes. However, Mr. Murray is less certain.“The order activity there was down very significantly,” said Mr. Murray. “There’s a fine line between not having communities [open] because of issues related to delays or whether you have fewer communities because you don’t want to open more communities.” He said it’s not clear if the new communities were not opened “because perhaps your expectations of future demand or what you’re seeing in the market are causing you not to want to open more communities.”Mr. Murray does not hold shares in Toll nor does his firm have an investment banking relationship with the company.Ms. Whelan does not hold shares in Toll, but her firm has acted as a manager or co-manager in underwriting or placement of securities in the company in the past five years.Toll’s shares yesterday rose $5.92, or 6.91%, to $91.65.

Toll’s Strong Earnings a Good Sign for Homebuilding Sector

Toll’s Strong Earnings a Good Sign for Homebuilding Sector

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