Homebuilder’s Poor Quarter Can’t Shake Analysts’ Confidence

0

Ryland Group Inc. looks good to analysts, but that’s because its dismal results aren’t catastrophic, which is what was expected.

On July 23, the Calabasas-based homebuilding company reported a quarterly loss of $5.70 per share and charges of $180 million. Both numbers were significantly worse than the estimates of Wall Street analysts, but those same analysts nevertheless cheered Ryland’s performance.

“Despite the earnings-per-share miss, operating results this quarter support our bullish thesis on Ryland,” wrote David Goldberg of UBS Financial Services Inc. Specifically, Goldberg noted that orders for Ryland homes have fallen 19 percent this year, not as steep as his own estimate of a 30 percent decline.

Goldberg maintains a “buy” rating with a 12-month target price of $34 per share, a premium of about 60 percent over the stock’s current trading range. Among the 12 analysts who cover Ryland, six give it a “buy” or “outperform” rating, with an average target price of $32. Another five analysts are neutral, and only one calls it a “sell.”

Why? The analysts believe Ryland is in better shape than its competitors. “We think Ryland’s conservative operating strategy of maintaining a limited land supply and focusing on markets with reasonable affordability, modest leverage and significant available liquidity make it well-positioned to navigate the current downturn, despite near-term risks from continued weak demand and falling home prices,” wrote Daniel Oppenheim, an analyst with Credit Suisse Group, in his report on July 23.

Oppenheim rates Ryland as outperforming the market with a target price of $28 per share.

While analysts remain upbeat on Ryland, investors have acted on the negative numbers. The stock’s price declined 19 percent on the day after its quarterly results announcement. Although Ryland continues to pay a quarterly dividend of 12 cents per share, its total return on investment for the last three years is minus 68 percent.

On July 24, the Census Bureau released a report for second-quarter 2008 showing 2.2 million vacant homes for sale in the U.S. According to an analysis by Charles Schwab & Co., that represents an 11 month supply of homes on the market.

“The fact that the inventory number rose again, despite the 6.1 percent decline in median home prices, indicates that the housing market remains under duress,” the Schwab report stated. “We continue to watch for signs of a bottom in the crisis, but unfortunately have yet to find any real convincing signals of light at the end of the tunnel.”

No posts to display