UPDATE 3-Toll loss widens, home prices fall

Fri Aug 21, 2009 6:29pm EDT

* Q3 shr loss $2.93; Wall Street view loss $3.03

* Home prices, gross margins down from previous quarter

* Shares fall 1.5 pct (Adds analyst and portfolio manager comments, updates shares)

NEW YORK, Aug 27 (Reuters) - Luxury home builder Toll Brothers Inc (TOL.N: Quote, Profile, Research, Stock Buzz) posted a narrower-than-expected quarterly loss on Thursday, but its shares fell amid concern about how much price cuts are supporting sales.

Toll's net loss widened to $472.3 million, or $2.93 per share, in the fiscal third quarter, ended July 31, from a net loss of $29.3 million, or 18 cents per share, a year earlier.

The latest results included deferred tax asset valuation allowances of $439.4 million and writedowns totaling $115 million.

The loss was slightly narrower than the $3.03 per share loss analysts had expected, according to Reuters Estimates.

However, analysts said the company's average home prices were down from the prior quarter and, as a result, so were gross margins.

The company sold 792 homes in the third quarter at an average price of $582,500, down more than 5 percent from the second quarter.

Gross margins, excluding charges, were the lowest so far in the current downturn at 14 percent, Stifel Nicolaus analyst Michael Widner said in a research note.

"Given the strong order volume reported in preliminary results and management's comments that stronger demand 'has already positively impacted our pricing power,' we hadn't anticipated such a large decline," Widner wrote.

Revenue was down 42 percent to $461.4 million. Toll reported preliminary revenue figures earlier this month.

For the first time in three years, the number of homes in its backlog grew compared with the prior quarter, the company said.

Toll is one of the first home builders to offer a snapshot of August demand. It said deposits -- a nonbinding precursor to contracts -- were up 26 percent in the first four weeks of its fiscal fourth quarter.

"We do see signs for optimism," Chief Executive Robert Toll said in a statement.

The company said it would not provide specific forecasts but said sales in the current quarter would be down from a year earlier. It said it would deliver between 475 and 725 homes in the quarter.

HOME BUILDERS' RALLY

Shares of home builders have rallied in recent months on expectations the sector has turned a corner. Home prices are up in many markets, sales have picked up nationally, and more Americans are filing mortgage applications.

An index of home construction stocks .DJUSHB is up about 93 percent since March 5, compared with a 50 percent advance by the Standard & Poor's 500 index.

But some market strategists say caution is warranted.

"Unemployment is going to stay pretty high. The consumer is still in fairly difficult straits," said Randy Bateman, chief investment officer of Huntington Funds.

"If you look at demographics, there's going to be a need for incremental housing. But that may take another year or so," he said, adding that investors unwilling to wait for the improvement may sell home builder stocks in the interim.

There is not enough demand until the next generation of home buyers enters the market in five to 10 years, said money manager Keith Springer, president of Capital Financial Advisory Services.

Springer, who does not own home builder shares, said about a third of home demand was being driven by an $8,000 first-time buyer credit. That credit is set to expire, so future demand is being pulled forward, a phenomenon he likened to the cash-for-clunkers auto sales program.

"Overall demand based on the number of people in the country looking for homes is declining, and is going to continue to decline," he said. "We overbuilt."

Toll shares were down 35 cents, or 1.5 percent, at $22.79 in midday trading on the New York Stock Exchange. (Reporting by Nick Zieminski and S. John Tilak in Bangalore; editing by John Stonestreet and Derek Caney)
 

Keith Springer is President of Capital Financial Advisory Services, a registered investment advisor, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith Springer at 916-925-8900 or Keith@KeithSpringer.com