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Ryland Group - Residential builder

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2008-02-21

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stories: rttnews.com

Times were good for Calabasas, CA-based Ryland as it recorded positive earnings for fiscal years 2003, 2004, 2005 and 2006. Profits topped out in 2005 at $447.05 million. For 2006 net earnings came in at $359.94 million. The corresponding stock price rode the trail up from under $20 in 2003 to over $80 per share in 2005. But the fall from grace for Ryland began from just above $60.00 as the 2007 earnings were nearly the negation of those in 2006 at $(333.5M).

Ryland employed about 2,800 people as of December, 2007.

The first hint that something was awry did not come until the company issued guidance in April and warned that it expected to report a fiscal first quarter loss for 2007. Reaction was strangely muted in both financial media at in the stock price. The shares hovered there above $40.00 until the end of May when the chart took a turn in the form of a straight line with a 45-degree downward slope. That trend continued into the low twenties in October. From there each attempted rally was met with more bad news and another sell off. The first dead cat bounce above 25 was hit by a downgrade by Citigroup which took a swipe at a swath of homebuilders.

Moody's cut Ryland's debt to junk on Dec. 19; not exactly a vote of confidence. On Jan 24, S&P downgraded Ryland to "hold". S&P says:

To date, the company continues to report lower asset write-downs than its peers, but we believe more charges are likely in the first half of 2008. We are lowering our 2008 EPS estimate to $0.80 from $0.90. Applying 1.15X price-to-book, a premium to peers, we are maintaining our 12-month target price of $31."

The call for any positive earnings strikes us as a little bit optimistic given the unabated downward plunge of the housing market in general. But they make a good point about write-downs; Ryland has not had many, and there will likely be more (our data, as of around the beginning of 2007, had Ryland with about 13% of book in land options before the bubble burst, and a further 1% in joint ventures). But this simply suggests to us new write-down losses piled on top of market losses—not exactly a recipe that would cause a swing back to a per-share profit. But we'll see.

In sum, Ryland definitely does not seem as distressed as many of its peers; but it is certainly feeling the pain of this market.

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Important: Ailing Builders haven't shut down, but they've suffered significant valuation declines, temporarily halted redemptions, or faced other major business hurdles. Builders on watch may not even have unusual declines relative to peers, but may be posted if it is felt there may be risk of developing a more serious condition in the near future.