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Equity Research United States

Toll BrothersTOL

Margin Upside SurprisesContinue TOL reported FY2Q05 EPS of $2.01, which was 12% higher than

consensus of $1.79, and better than our recently revised estimate of $1.74.The upside surprise was driven by a number of items, the most significantbeing gross and operating margin leverage ($0.16 upside) in addition to alower than expected tax rate ($0.06 upside).

Positives from the quarter and call were as follows:1) Operating margincontinues to improve, up 560 basis points to 22.8%, with TOL benefiting fromstrong pricing power in backlog, which began in the middle of last year inaddition to lower than expected costs in COGS and lower than expectedmarketing expenses; 2) As previously reported, new order growth of 23% and

38% in units and dollars follows difficult comparisons from the prior year,contributing yet again to solid backlog (+38% units; +57% dollars); 3) Marketconditions continue to trend strongly in the majority of its markets with pricingup as much as 30-40% in some of the hotter markets for identical homes.TOLs average closing price improved 15% to $641,200 in 2Q05.

Negatives from the quarter and call were as follows:1) TOLs sharecount increased 4% YOY in 2Q05 despite buying back 400K shares (~0.5%of shares). TOL expects its share count will continue to increase, citing higherreturns from investing in land versus buying back stock or paying dividends.2) Two weeks ago, TOL managed down expectations, reporting that SG&Aand COGS as a % of sales would be at the high end of its 1Q05 guidance.We reduced our 2Q05 estimate from $1.84 to $1.74 at the time, but TOLreported significantly above its margin view, resulting in most of the upside.3) 22% of the upside to our EPS estimate was driven by a lower than

expected tax rate (at 36.5% versus our 38.5%).

TOL raised its 2005 net income guidance. Although management does notprovide specific EPS guidance, it did raise its 2005 outlook to approximately70% net income growth versus its prior guidance of at least 60% growth andmaintained its 20% growth expectation in 2006. We are raising our fiscal2005 earnings estimate to $8.80 per share excluding a $0.03 charge (80%net income growth) from $8.30 per share and are increasing our 2006estimate to $10.15 (17% net income growth) from $9.50.

TOL is trading at 9.6x our next twelve month estimateand 2.6x projectedyear-end book value compared with its peer group median multiples of 7.7and 1.7x, respectively. There were few flaws in the quarter, and we believethat TOLs focus on the upper-price point should mitigate earnings risk in arising rate environment. Nonetheless, we maintain our Neutral rating, as we

believe current valuation reflects these positive aspects. Our price target of$85 (up from $80), which is based on CSFBs Value-Equation Framework,price-to-book and price-to-earnings multiples implies roughly 9.0 timesforward earnings and 7% downside from the current price.

IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS ARE IN THE DISCLOSURE APPENDIX. U.S. Disclosure: CSFB does andseeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of intethat could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customof CSFB in the United States can receive independent, third party research on the company or companies covered in this report, at no cost to them,where such research is available. Customers can access this independent research at www.csfb.com/ir or call 1 877 291 2683 or email

equity.research@csfb.com to request a copy of this research.

research team

Ivy L. Zelman212 325 2443ivy.zelman@csfb.com

Dennis McGill212 325 4466dennis.mcgill@csfb.com

Justin Speer216 839 2100justin.speer@csfb.com

Rating NEUTRA

Price (26 May 05) 91.65 (UTarget price (12 months) 85.00 (U52 week high - low 91.65 - 37Market cap. (US$m) 6,644Enterprise value (US$m) 7,830Region / Country Americas / United StaSector HomebuildAnalyst's Coverage Universe Homebuild

Weighting (vs. broad market) MARKET WEIGDate 27 May 2* Stock ratings are relative to the coverage universeeach analyst's or each team's respective sector.

Price / Indexed S&P 500

37

47

57

67

77

87

May-04 Aug-04 Nov-04 Feb-05

Daily May 26, 2004 - May 25, 2005, 5/26/04 = US$40.5

Price Indexed S&P 500

On 05/25/05 the S&P 500 index closed at 1,197.62

Year 10/04A 10/05E 10/

EPS (CSFB adj., US$) 5.04 8.77 1

Prev. EPS (US$) 8.30

P/E (x) 17.0 10.3

P/E rel. (%) 90.5 61.2Q1 EPS 0.62 1.33Q2 0.89 2.01

Q3 1.31 2.26

Q4 2.22 3.17

Number of shares (m) IC (10/05E, US$m)

77.51 4,42

BV/Share (Current, US$) EV/IC (x)

29.44

Net Debt (Current, US$m) Dividend (Current, US$m)

1,186

Net debt/Total cap. (Current) Dividend yield

32.3%

Year 10/04A 10/05E 10/

Revenues (US$m) 3,893.1 5,615.8 6,9EBITDA (US$m) 764.0 1,344.0 1,5

OCFPS (US$)

P/OCF (x)

EV/EBITDA (x) 10.2 5.8

ROIC 14.7% 20.7% 19

Source: Company data, CREDIT SUISSE FIRST BOSTON (CSFB) estimates

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Summary & Opinion

Earnings Estimates & Opinion

Although the company does not provide specific earnings per share guidance, it did

raise its fiscal 2005 outlook to approximately 70% net income growth versus its prior

guidance of at least 60% growth. Additionally, despite the higher base earnings in

2005, management believes it can still achieve earnings growth of approximately 20%in fiscal 2006.

For fiscal 2005, management continues to expect closings to increase approximately

22-27% versus 2004 (8,100 8,400 units), but the company did increase the low end

of its target by 50 units. Additionally, average selling price is now projected to increase

11-13% ($643,000-$654,700), which is an increase from the prior guidance of 10-

11%. Operating margin is expected to improve approximately 330 to 410 basis points

in 2005, up from prior guidance of a 290 to 340 basis points improvement. This

implies and operating margin range of 21.4-21.9%.

We are raising our fiscal 2005 earnings estimate to $8.80 per share excluding an

expected $0.03 charge (75% growth) from $8.30 per share. Our earnings estimate,which is based on net income growth of 80%, incorporates 44% homebuilding

revenue growth (28% units; 13% price) and 430 basis points of operating margin

expansion to 22.8%. Additionally, our projection assumes a lower average tax rate of

38.0% (down from 38.8%) and an average share count of 84.8 million (+4% year over

year). We are also bumping up our 2006 estimate to $10.15 (15% growth) from $9.50.

TOL continues to deliver profitability and growth above our expectations while

continuing to increase both returns and inventory efficiency. We believe that TOL has

a business model and footprint that: 1) Separates it from the majority of the public

builders from a direct competition standpoint; 2) Benefits from a customer base that is

less sensitive to the impact of higher interest rates on affordability; and 3) Provides abroad geographic backdrop from a profitability standpoint.Nonetheless, we maintain

our Neutral rating, as we believe current valuation reflects these positive aspects. Our

price target of $85 (up from $80), which is based on CSFBs Value-Equation

Framework, price-to-book and price-to-earnings multiples implies roughly 9.0 times

forward earnings.

Earnings Summary

TOL reported FY2Q05 EPS of $2.01, which was 12% higher than consensus of $1.79,

and better than our recently revised estimate of $1.74. Our original estimate stood at

$1.84, which we lowered given a shortfall in revenues. The upside surprise was driven

by a number of items, the most significant being gross and operating margin leveragein addition to a lower than expected tax rate.

Homebuilding revenues (previously reported) increased 52% to $1.23 billion, driven

by a 31% increase in closings and a 15% rise in average selling price to $641,200.

Revenues including land sales, equity joint venture income and other totaled $1.25

billion.

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Homebuilding operating margin increased 560 basis points to 22.8%, exceeding the

recent high water mark in 4Q04 (21.0%), despite TOL reporting deliveries below the

low end of its guidance last month. The upside resulted from 400 basis points of gross

margin expansion to 32.2% and a better than expected 150 basis point improvement

in SG&A as a percent of sales to 9.5%. Both gross margin and SG&A came in

significantly better than managements guidance from two weeks ago. We were

projecting a 380 basis point improvement in operating margin to 21.0%. The stronger

than expected margins led to roughly $0.16 upside to our estimate.

Income generated from land sales, equity joint ventures and other totaled $12.5

million versus our estimate of $10.0 million ($0.02 upside surprise). TOLs 36.5% tax

rate versus our expectation of 38.5% culminated in $0.06 upside to our estimate.

As previously reported, new orders in 2Q05 increased 23% in units and 38% in

dollars. Backlog at quarter-end was up 38% in units and 57% in dollars.

TOLs debt-to-capital at quarter end was 42.1%, down from the 2Q04 level of 49.3%.

TOLs return on capital continues to expand, at 17.7% from 11.9% in 2Q04, driven by

increased asset efficiency, profitability and leverage.

TOLs 68,000 lots controlled represents approximately a 7-8 year supply of lots basedon next twelve month projected closings.

ARMs represented over 60% of TOLs business in the quarter, with interest only loans

comprising 34% of TOLs closings and 30% of new contracts.

TOL expects to incur a $2.7 million after tax charge for early retirement of debt in the

third quarter. The company recently issued $300 million of senior notes, which will be

used to retire old debt obligations.

Please see Exhibit 1 for a comparison of TOLs actual results versus our pre-earnings

announcement estimates and Exhibit 2 through Exhibit 4 for our current quarterly and

annual projections.

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Exhibit 1: Toll Brothers 2Q05 Earnings Results, Actual versus Estimated

2Q04A 2Q05A 2Q05E

Variation from

Estimate

Homebuilding Revenues $814.3 $1,226.0 $1,226.0 0%Land Sales $2.0 $9.8 $5.0Equity JV, Interest & Other Revenues 3.2 12.5 10.0Net Revenues $819.5 $1,248.3 $1,241.0 1%

Cost of Homebuilding Sales 584.6 830.6 845.9 -2%

Homebuilding Gross Profit $229.7 $395.3 $380.1Writedown on Land Inventory 0.3 1.0 1.0Homebuilding Gross Margin 28.2% 32.2% 31.0% 120

SG&A Expense $89.9 $116.4 $122.6 -5%SG&A - % of Sales 11.0% 9.5% 10.0% -50

Homebuilding EBIT $139.8 $279.0 $257.5

Homebuilding EBIT Margin 17.2% 22.8% 21.0% 180Cost of Land Sales 1.5 5.3 2.5

Gain on Land Sales 0.5 4.5 2.5Interest Expense $21.2 $28.1 $29.8Interest Expense - % of Sales 2.6% 2.3% 2.4% -10Pre-Tax Income $122.3 $267.8 $240.2

Pre-Tax Income - % of Sales 14.9% 21.5% 19.4% 210Income Taxes $44.9 $97.7 $92.5

Income Tax Rate 36.7% 36.5% 38.5% -200Operating Net Income $77.3 $170.1 $147.7 15%Extraordinary Gain/(Loss) ($4.9) $0.0 $0.0Reported Net Income $72.4 $170.1 $147.7Earnings Per Share - Basic $1.04 $2.20 $2.03Earnings Per Share - Diluted $0.95 $2.01 $1.74 15%

Extraordinary Gain/(Loss) per share ($0.06) $0.00 $0.00Reported EPS - Diluted $0.89 $2.01 $1.74 15%

Basic Shares Outstanding 74.4 77.3 72.8Diluted Shares Outstanding 81.4 84.7 84.7 0%

Operating Data

Homes Closed - Units 1,463 1,912 1,912 0%

% of Backlog Closed 29% 26% 26%Average Closing Price $556,602 $641,213 $641,213 0%

New Orders - Units 2,595 3,181 3,181 0%Community Count at Quarter-End 205 227 227

% Change in Community Count 18% 11% 11%Average Community Count 205 226 226Absorptions per Community 12.7 14.1 14.1Backlog - Units 6,211 8,561 8,561Backlog - Dollars (in millions) $3,731 $5,866 $5,866Average Price in Backlog $600,692 $685,247 $685,247Joint Venture Backlog (in millions) $4.5 $111.7 $111.7

Key Measures

Debt/Capital 49.3% 42.1% 43.5% -140Net Debt/Capital 44.4% 32.3% 39.4%Return on Capital 11.9% 17.7% 17.1% 60

Return on Equity 20.3% 29.3% 28.3%Inventory Turns 0.69 0.82 0.82Inventory Days 533 444 445AR Days Outstanding 27.6 31.4 30.8Accrued Expenses Turnover 6.4 6.4 6.6AP Days Outstanding 14.9 17.5 17.9Net Working Capital 2,889.7 3,300.5 3,484.6Net Working Capital % of Sales 84% 66% 66%

Source: Company data, CSFB estimates

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Exhibit 3: TOL Earnings Model, 2004A2006E

YOYYOY % and Basis Point Changes 1Q04A 2Q04A 3Q04A 4Q04A 2004A % Chg 1Q05A 2Q05A 3Q05E 4QRevenues 5% 35% 46% 62% 40% 67% 52% 41%Gross Profit 9% 40% 51% 65% 45% 82% 72% 61%Gross Margin 100 100 100 60 90 230 400 400SG&A Expense 17% 33% 42% 35% 32% 40% 29% 24%SG&A - % of Sales 120 (20) (30) (150) (60) (220) (150) (130)Housing EBIT 4% 45% 58% 79% 53% 117% 100% 83%Housing EBIT Margin (30) 120 130 210 150 450 560 530Net Income from Cont. Operations 5% 46% 56% 89% 57% 120% 120% 82%Earnings Per Diluted Share -4% 32% 46% 83% 46% 114% 112% 74%Operating DataHomes Closed - Units 5% 32% 42% 52% 35% 47% 31% 26%Average Closing Price 1% 3% 3% 6% 4% 14% 15% 12%New Orders - Units 43% 56% 40% 29% 42% 44% 23% 15%Average Community Count 19% 18% 17% 18% 18% 10% 11% 10%Backlog - Units 51% 59% 56% 44% 44% 44% 38% 33%Average Price in Backlog 3% 6% 12% 17% 17% 16% 14%

Regional DataClosings - Units 1Q04A 2Q04A 3Q04A 4Q04A 2004A 1Q05A 2Q05A 3Q05E 4QNortheast - D 183 216 256 361 1,016 229 254 313Mid-Atlantic - D 405 534 616 843 2,398 663 759 830Midwest - D 72 99 136 171 478 95 141 150Southeast - D 121 192 205 254 772 155 197 256Southwest - D 149 190 205 358 902 248 305 350West Coast - D 155 232 266 408 1,061 200 256 230

Total Unit Closings 1,085 1,463 1,684 2,395 6,627 1,590 1,912 2,129 2

New Orders - UnitsNortheast 222 282 270 338 1,112 319 495 405Mid-Atlantic 527 911 748 783 2,969 767 1,177 823Midwest 120 187 164 159 630 112 212 180Southeast 174 268 361 284 1,087 381 463 415Southwest 233 425 455 431 1,544 366 579 501West Coast 236 522 331 253 1,342 228 255 348Total Unit New Orders 1,512 2,595 2,329 2,248 8,684 2,173 3,181 2,671 2

Backlog- UnitsNortheast 971 1,037 1,051 1,028 1,028 1,118 1,359 1,451 1Mid-Atlantic 1,796 2,173 2,305 2,245 2,245 2,349 2,767 2,760 2Midwest 357 444 458 446 446 463 534 565Southeast 464 540 696 726 726 952 1,218 1,377 1Southwest 793 1,028 1,278 1,351 1,351 1,469 1,743 1,893 1

West Coast 713 1,003 1,068 913 913 941 940 1,057Total Unit Backlog 5,094 6,225 6,856 6,709 6,709 7,292 8,561 9,104 8

Source: Company data, CSFB estimates

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Companies Mentioned (Price as of 25 May 05)

Toll Brothers (TOL, $85.73, NEUTRAL, TP $80.00, MARKET WEIGHT)

Disclosure AppendixImportant Global Disclosures

I, Ivy L. Zelman, certify that (1) the views expressed in this report accurately reflect my personal viewabout all of the subject companies and securities and (2) no part of my compensation was, is or will bedirectly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names.

3-Year Price, Target Price and Rating Change History Chart for TOL

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Closing Price Target Price Initiation/Assumption Rating

USD

Current: O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not RatedPrior to 9-Sep-02: SB=Strong Buy; B=Buy; H=Hold; S=Sell; R=Restricted; NR=Not Rated

TOL Closing Target Initiation/

Date Price (US$) Price (US$) Rating Assumption

9/6/02 25.25 OUTPERFORM

11/7/02 20.2 27 NEUTRAL

12/12/02 20.39 242/26/03 19.52 23

5/8/03 24.82 29 OUTPERFORM

5/29/03 28.32 308/7/03 28.2 32

8/27/03 29.19 36

11/7/03 37.66 40 NEUTRAL2/6/04 40.68 42

5/19/04 37.24 40

8/6/04 41.7 448/26/04 43.97 47

11/9/04 50.63 5512/10/04 64 682/24/05 87.35 75

5/11/05 80.4 80

The analyst(s) responsible for preparing this research report received compensation that is based uponvarious factors including CSFB's total revenues, a portion of which are generated by CSFB's investmenbanking activities.

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Analysts stock ratings are defined as follows***:Outperform: The stocks total return is expected to exceed the industry average* by at least 10-15% (omore, depending on perceived risk) over the next 12 months.Neutral: The stocks total return is expected to be in line with the industry average* (range of 10%) ovethe next 12 months.Underperform**: The stocks total return is expected to underperform the industry average* by 10-15% omore over the next 12 months.

*The industry average refers to the average total return of the analyst's industry coverage universe

(except with respect to Asia/Pacific, Latin America and Emerging Markets, where stock ratings arerelative to the relevant country index, and CSFB HOLT Small and Mid-Cap Advisor stocks, where stockratings are relative to the regional CSFB HOLT Small and Mid-Cap Advisor investment universe.**In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested thaanalysts maintain at least 15% of their rated coverage universe as Underperform. This guideline issubject to change depending on several factors, including general market conditions.***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three ratingdefinitions.

Restricted: In certain circumstances, CSFB policy and/or applicable law and regulations preclude certaitypes of communications, including an investment recommendation, during the course of CSFB'engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% omore in a month in at least 8 of the past 24 months or the analyst expects significant volatility goingforward. All CSFB HOLT Small and Mid-Cap Advisor stocks are automatically rated volatile. All IPO stocksare automatically rated volatile within the first 12 months of trading.

Analysts coverage universe weightings* are distinct from analysts stock ratingsand are based on the expected performance of an analysts coverage universe**versus the relevant broad market benchmark***:Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12months.Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over thenext 12 months.Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12months.*CSFB HOLT Small and Mid-Cap Advisor stocks do not have coverage universe weightings.**An analysts coverage universe consists of all companies covered by the analyst within the relevan

sector.***The broad market benchmark is based on the expected return of the local market index (e.g., the S&P500 in the U.S.) over the next 12 months.CSFBs distribution of stock ratings (and banking clients) is:

Global Ratings DistributionOutperform/Buy* 39% (56% banking clients)Neutral/Hold* 43% (55% banking clients)Underperform/Sell* 16% (43% banking clients)Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, andUnderperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stockratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should bebased on investment objectives, current holdings, and other individual factors.

See the Companies Mentioned section for full company names.

Price Target: (12 months) for (TOL)Method: CSFB Value-Equation Framework, Multiple AnalysisRisks: Increase in mortgage rates, softness in high-end, luxury housing demand, delays in building permapproval process leading to slowdown in community openings.

See the Companies Mentioned section for full company names.The subject company (TOL) currently is, or was during the 12-month period preceding the date odistribution of this report, a client of CSFB.CSFB provided non-investment banking services, which may include sales and trading, to the subjeccompany (TOL) within the past 12 months.

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CSFB and/or its affiliates expect to receive or intend to seek investment banking related compensation fromthe subject company (TOL) within the next 3 months.CSFB and/or its affiliates have received compensation for products and services other than investmenbanking services from the subject company (TOL) within the past 12 months.

Important Australian and Canadian Disclosures

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Votinshares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.Individuals receiving this report from a Canadian investment dealer that is not affiliated with CSFB should

be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investmendealer would be required to make if this were its own report.An analyst involved in the preparation of this report has visited certain material operations of the subjeccompany (TOL) within the past 12 months. The analyst may not have visited all material operations of thsubject company. The travel expenses of the analyst in connection with such visits were not paid oreimbursed by the subject company, other than de minimus local travel expenses.For Credit Suisse First Boston Canada Inc.'s policies and procedures regarding the dissemination of equityresearch, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.For disclosure information on other companies mentioned in this report, please visit the website awww.csfb.com/researchdisclosures or call +1 (877) 291-2683.Disclaimers continue on next page.

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Disclaimers

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