Kool-Aid at Toll Brothers

On December 5th Toll Brothers reported 4th Quarter Earnings and the results were not exactly pretty.

Highlights

• 2006 4th Q net income declined 44% vs. 2005 from $310.3 million to $173.8 million.
  
• 2006 4th Q earnings per share declined 42% versus 2005.
• 2006 4th Q revenues declined 10.4% vs. 2005 from $2.02 billion to $1.81 billion.
  
• 2006 4th Q backlog declined 25.3% vs. 2005 from $6.01 billion to $4.49 billion.
• 2006 4th Q signed contracts declined 55.6% vs. 2005 from $1.59 billion to $706 million.
• 2006 4th Q cancellations came in at 585.
  
• 2007 Deliveries are expected to be between 6,300 and 7,300 homes.
• 2007 Land write-offs are expected to rise 375% from $16 million to $60 million.

Robert I. Toll, chairman and chief executive officer, stated:

"In tough times, our team produced our fifteenth consecutive year of record revenues and our second highest annual profits. These accomplishments are exceptional, considering the significant rise in cancellations, and are a tribute to our associates' commitment and hard work.

Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above.

As we previously announced, this quarter's results were negatively impacted by our higher than normal 585 cancellations. With these cancellations creating unintended specs, we could face increasing margin pressure as we seek to move these homes.

Right now is a great time to buy a new luxury home. Builders are motivated to sell their specs and the fundamentals that typically lead our industry out of a slowdown are already in place. Interest rates are near historic lows, unemployment is near an all-time low and the stock market is setting records."

The Conference Call

The Conference Call was even more interesting (and entertaining) than the earnings report. Here are the highlights with Ivy Zellman at Credit Suisse questioning Robert Toll.

Ivy Zellman: "Which Kool-Aid are you drinking because I want some ... It's not what we are hearing from a lot of the other builders. ...What do you see in the data because your numbers certainly don't show it today and there is clearly a lot of risk that 2007 won't bring the optimism to reality that you are seeing, so why put your neck out Bob?"

Robert Toll: "I don't think I put my neck out. I think I made a statement in regard to what I witnessed. ... But I don't think I've made a statement with respect to the future ... I've just told what I have witnessed."

Ivy Zellman: "I'm sorry. I thought you said pent up demand...."

Robert Toll: "I think the pent up demand statement falls logically..... Taking the DC market as an example .... It would logically follow that demand is increasing in the DC market"

Ivy Zellman: "I guess that's fair but why, to be a little more pointed, if you are as optimistic as you seem//"

Robert Toll: (cutting off Ivy) "I didn't mean to project optimism, I only meant to project what I've seen in the past"

Ivy Zellman: "Ok well let's just say that you read a report that stocks will continue to surge why only buy 12 thousand shares of your stock why not buy a boatload of your stock if you really believe stocks were headed north here?"

Robert Toll: (cutting off Ivy at one point but she finishes anyway this time) "Well I referred to somebody else's belief but let us say that I believe, which I am unwilling to make a statement on, to assume your proposition that I believe, which I don't necessarily, but let us assume that I do, your question why wouldn't I buy stock ... and the answer is I believe I can make more money with my powder cash buying land and expanding the business than I believe I could make by buying my stock" [Mish note: Yes as silly as it might look in print, that is what Toll said.]

Ivy Zellman: "I think a lot of people if they ever follow you Bob, in your buying and selling personally, they made a lot of money, and I'll leave it at that". [Mish note: This is clearly in reference to insider sales.]

Comments on Silicon Investor

Also entertaining were these comments posted on Silicon Investor.

Ramsey Su
summary of what Ivy said:
Bob, You are full of sh*t!!!!!

GT
LOL, IVY just insulted Bob and he said, "THANK YOU"
The guy is so dumb he does not understand what she is saying.

Ramsey Su
Seriously, when questioned, Bob Toll is pretty admitting that he was just pumping. NO areas are improving. He based his entire dancing at bottom on a couple of refundable deposits.

CalculatedRisk
OK, I listened to the recorded call. I've been on both sides of calls, and these guys seemed very unprofessional to me. "I didn't mean to project optimism."
Amazing.

Spec Homes

Toll Brothers has a website that lists "Quick Delivery" Homes.

Quick Delivery Homes are new homes in Toll Brothers communities that are already under construction and are ready to move into in a matter of weeks or months. Our Quick Delivery Homes (often called Inventory Homes or Spec Homes) reduce the time it takes to build a custom luxury home while still allowing you to select many of the custom features available from our extensive 500+ catalog of possibilities.

Ramsey Su totaled them all up, came up with 612, and noted "That seems to be a lot for a builder who says they do not build specs." Here are the totals by state.

AZ 42, CA 42, CO 9, CT 5, DE 7, FL 114, IL 18, MA 9, MD 24, MI 32
MN 3, NC 29, NJ 38, NV 63, NY 13, PA 37, RI 2, SC 12, TX 35, VA 78
612

Ignoring the current cancellation rate, ignoring the spec homes, and assuming the optimistic projection of 7,300 home sales comes in, Toll is still sitting on a 10 year's supply of land with 74,000 lots. That makes his comment to Ivy about buying more land seem more than a bit disingenuous. All things considered, the odds of Toll "dancing on the bottom" seem rather remote.

Disclosure.
I have no current position in TOLL (but I may take one).

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/