Negatives from the quarter and call:
(1) TOL wrote off $115 million of land with the majority taking place in California and Detroit. This was above the high end of its $50-100 million range last month. In the last three quarters, TOL has written off $152 million of land, comprising 3.4% of 2005 shareholder’s equity. Although TOL provided for $60 million of additional write-offs in 2007 guidance, it emphasized that it’s virtually impossible to predict.
(2) TOL’s operating margin guidance for 2007 implies ~700 basis points of additional decline from the 18.7% reported in 2006. The slide stems from increased penetration of spec units from cancellations (specs = 15-20% of backlog), requiring ~10% incentives to move, in conjunction with increased land costs, more communities and a generally tough environment.
(3) As previously reported, TOL’s can rate of 37% jumped significantly from the 5-10% range historically, just below the group average of 39%.
(4) CS views TOL’s optimism regarding market conditions and the potential for surging demand as disconcerting given what we believe is a lack of meaningful supporting evidence.
Credit Suisse for one are not altogether happy with Toll’s (TOL) 2007 guidance or forthrightness. From the Credit Suisse report: