(TOL) Toll Brothers Faces Rating Cut

Toll Brothers Inc. (TOL) has been recently downgraded by Standard & Poor’s Rating Services to a “BB-plus” status from a prior “BBB-minus.” The cut in corporate credit rating implies the company’s weak prospects in the near term. The housing market is still in a fragile stage and thus the spring home sale season is likely to disappoint the homebuilders.

Standard & Poor, however, maintained its stable outlook on the company based on Toll Brothers’ satisfactory business profile and competitive advantage over other homebuilders in the industry.

During the last reported quarter, Toll Brothers posted a net loss of $31.5 million or 19 cents per share compared with a net loss of $40.4 million or 24 cents per share a year ago. Revenues rose 3% year over year to $319.7 million, driven by a 3% increase in deliveries.

The company ended the quarter with a lower cash balance. The company had cash and cash equivalents of $950 million as of April 30, 2011 compared with $1.04 billion as of October 31, 2011. This could limit the company’s long-term investments to some extent.

The company expects to deliver 2,300 to 2,800 homes in fiscal 2011 at an average price of $540,000 to $560,000. Total selling communities is projected between 215 and 225.

However, Toll Brothers continuous efforts to fight the situation and minimize its losses as much as possible are commendable. The company’s aggressive purchase of lots is aimed at fully utilizing the growing demand once the pace of recovery gains momentum. Recently, Toll Brothers acquired 180 acres of land in Katy from Moody-Simmons Partners with an objective to develop 305 home lots on the property.

Moreover, the settlement of the land dispute related to a failed housing development deal near Las Vegas is also expected to bring short-term relief to the company. As result, the shares of Toll Brothers Inc. are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating.

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