Boston, MA, August 5--Wachovia Securities downgraded shares of Toll Brothers Inc. to market perform from outperform on high valuations and signs of a slowing housing market in Washington, D.C.
Fiscal third-quarter orders were also slightly below Wachovia's forecast, although revenue was slightly better than expected, the analysts said in a research note to clients.
On Thursday, Toll Bros. said quarterly new-home orders rose 18% to 2,746 units from 2,329 in the year-ago period. Wachovia's estimate was 2,835 homes, or an increase of 22%.
Revenue climbed 55% in the fiscal third quarter, ahead of Wachovia's 43% forecast.
The broker said its July survey indicates a slowing market in the nation's capital, which represented roughly 23% of Toll's 2004 home deliveries and 15% of its current community count.
"If this negative change accelerates, it could be a catalyst for multiple compression for Toll," Wachovia said.
The analysts also cited Toll's relative valuation -- the stock price is at a 37% premium to Wachovia's coverage universe, flirting with 7-year highs.
Wachovia said it sees shares of Toll performing more in-line with the broader market.
Yet the analysts said they "continue to like Toll's monopolistic land positions in some markets, strong demographic demand underpinnings and excellent growth over the long term."
Reflecting home deliveries, which exceeded Wachovia's estimates, the broker raised its 2005 per-share earnings estimate to $4.27 from $4.17.
Analysts polled by Thomson First Call see earnings of $4.28 a share in 2005.
