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Home builders get their bells rung
Toll Brothers once again cuts its forecast for home sales and sector's stocks take a dive. CEO: Speculators are now becoming sellers.
By Robert Walberg
Has the bell finally tolled for the home builders?
Yes, and pardon the pun. A second straight revenue warning by Toll Brothers (TOL, news, msgs) may indeed be the death knell for builders.
For the second time in three months, Toll Brothers significantly cut its forecast for home sales. The company now anticipates closing on 9,200 to 9,900 homes in the fiscal year ending in October. That's down from its Nov. 8 forecast of 9,500 to 10,200 homes, which itself was down from the original prediction of 10,200 to 10,600 homes.
To make matters worse, management announced that new orders for the quarter fell to 1,572, from 2,209 -- a decline of nearly 29%. The value of those contracts declined as well, falling 21% to $1.14 billion.
CEO Robert Toll cited delays in obtaining certificates of occupancy, construction inspections and utility hook-ups as primary reasons for the lower-than-expected first-quarter closings. Toll tried to soften the blow by reminding investors that 2005's results are tough to match, as that was a record year for the company.
Buyers are now sellers
Nevertheless, it appears obvious that demand in the sector is slowing. Management at Toll admitted as much, noting that inventories of homes are rising in some markets and that "speculative buyers in these markets are now becoming sellers.
To be fair, all the news wasnt bad. Toll Brothers ended the quarter with a backlog of 8,635 homes under contract for construction. According to the company, the value of the backlog rose 22%, to a record $5.95 billion. Toll also posted record revenue of $1.33 billion in the first quarter, a jump of 35%.
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Unfortunately, the Street expected sales of $1.35 billion. A minor miss, perhaps. But, in a sector that has made a habit of blowing away sales and earnings targets in recent years, any miss is a big deal.
It doesnt help that the shortfall and warning came on the heels of an 11% drop in quarterly orders at Standard Pacific Corp (SPF, news, msgs), which cited cooling demand. The sector's performance Tuesday showed just how concerned investors are about a slowdown. Toll Brothers' shares fell 5.5%.
Tuesday's news from the National Association of Realtors only exacerbated market fears. The trade group said it expects new home sales to fall 8.5%, starts to decline by 9.3% and existing home sales to slide by 4.7%. The fact that these declines are from record numbers in 2005 wont matter, as the Street is more interested in the trend than in the actual numbers.
The Dow Jones U.S. Home Construction index was down 3.1% Tuesday. The index has now shed 22% since peaking in late July of last year. Toll Brothers is down almost 49% from its 52-week high.
Rising interest rates and slowing demand have provided a lethal one-two punch to the home builders. The stocks may look cheap after falling so far, but dont expect the sector to get off the mat anytime soon.
Read more on the Realtor's forecast.
GM slowly getting things right
In an unrelated development, but one that I've been lobbying for, General Motors (GM, news, msgs) finally said it would cut its bloated dividend in order to shore up its faltering financials. Pressured by Kirk Kerkorian and his group, GM slashed its dividend by 50% and cut the salaries of upper management by between 30% and 50%. In a less popular move, management also announced that it will cut health benefits for salaried retirees.
The actions were widely expected and seen as necessary if GM wants to win concessions from union workers and stave off bankruptcy. The company has been actively working to cut costs for several months in an effort to turnaround its North America operations that lost billions last year.
GM's stock fell 2.2% on Tuesday. Still, slowly but surely, management is making the right moves to put GMs domestic operations back on track. Now if they would just admit to the need for styling changes, continued quality enhancements and product downsizing, the stock might just be worth buying again.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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