Amid the United States housing market's faltering recovery, investors are bracing for more bad news from Toll Brothers Inc and for housing in general when the biggest luxury builder reports quarterly earnings on Wednesday.
Wall Street is anticipating a fiscal third-quarter loss of 14 cents per share. That is narrower than last year's loss of $2.93 but still weak compared with rivals PulteGroup Inc and D.R. Horton Inc , which reported profits in their most recent quarters.
The end of Toll's fiscal second quarter coincided with the expiration of the federal homebuyer tax credit.
That means the coming results provide a glimpse of an entire quarter's worth of new home demand not boosted by the credit, which benefited Toll Brothers' business by helping its customers find buyers for their homes, said Morningstar analyst Eric Landry.
Sentiment in the homebuilder sector has just gone completely south since the tax credit expired, Landry said. It's been a 180-degree change.
Wednesday's results will reflect the post-tax credit reality to a degree that Toll's rivals have yet to experience, say analysts and investors.
We'll see a real slowdown in new orders, said Thomas Villalta, whose Jones Villalta Opportunity Fund owns Toll Brothers shares. He sees the company posting a bigger loss than Wall Street expects.
It's going to be rocky over the next six months and this quarter is going to be a rocky quarter, he said.
Even an admittedly optimistic orders estimate from Ticonderoga Securities analyst Stephen East has them slipping 10 percent to 751 units, according to a note to clients.
East sees operating margins at a solidly negative 2.9 percent, down slightly from last year.
These days, builders' margins are determined by the amount of new and cheaper land versus expensive legacy land they are using, Landry said.
Because Toll Brothers tends to build on land that is closer to job centers and harder to move through the government approvals process, it might be using relatively less new land than the competition.
Toll shares have been a bit of a disappointment over the last year and a half, Villalta said. We thought we had gotten in at fairly reasonable prices, yet the stock has done nothing since we've owned it. It's probably even down slightly.
Of course, share prices of all the biggest homebuilders have fallen since the beginning of the year. Toll's are down 14.2 percent at $16.29 per share.
But in the long run, both Landry and Villalta see value in the company.
Toll's expensive land will be a competitive advantage later although it is dragging down margins now, Landry said.
The company's development process takes longer than the guys who just go and knock down a corn field, he said, but future buyers will pay high prices for those desirable locations.
We're not going to try to pick the bottom but we think people will wake up a few years from now and see significant gains in this area and in Toll Brothers, Villalta said.
(Reporting by Helen Chernikoff, editing by Matthew Lewis)