Despite its second quarter earnings miss, Wall Street analysts appeared optimistic that The Ryland Group's third quarter results, due out after market close on Wednesday, would show much improvement. Analysts have predicted that the company's losses would narrow from $1.70 a share, or $73.7 million, in 2Q2009 to an average of $0.88 a share on $354.0 million in revenues for the third quarter.
Driving the expected claw back toward the black will likely be some fattening of gross margins as well as limited impairments. Analysts with JMP Securities estimated that the company will incur roughly $40 million in impairment charges for 3Q2009, slightly down from the $47.3 million the company took during the second quarter; Credit Suisse analyst Dan Oppenheim, however, projected impairments to be in the $59 million range.
In terms of margins, analysts anticipate seeing improvement continue during the third quarter, as it had during the two previous quarters, although margins themselves likely will lag peers. Last quarter, margins were a significant drag on the company's results at a skinny 7.8%.
Last quarter's 33.7% increase in backlog from 1Q2009 could lead to better closing numbers and growth in revenues from the second quarter's $261.6 million.
However, order numbers will be the metric to watch. With its intense focus on the entry-level market--52% of Ryland's buyers last quarter were first-time buyers, according to Raymond James analysts--coupled with the Dec. 1 expiration of the federal $8,000 first-time home buyer tax credit, the company could see a bump in orders. In fact, some mid-quarter meetings among key housing analysts and Ryland management revealed that demand was giving the company some pricing flexibility.
For example, in a Sept. 3 research note, Wells Fargo analysts Carl Reichardt commented on this key takeaway from his meetings with Ryland's senior leaders:
"Orders and prices have stabilized in most markets. Sales conditions are strongest in Baltimore/Washington, D.C., with sales [in] the Western U.S. weakest. Management has raised prices in 10-15 communities company-wide over the last 30 days."
However, the company's ability to capture orders during the third quarter also could have been hobbled by both its decrease in its number of actively selling communities--218 communities by Raymond James' last count--and its low spec levels, which would affect the number of homes that could close before quarter end. Inventory of houses started and unsold decreased by 29.9% to 448 units during the second quarter, from 639 units at Dec. 31, 2008.
Credit Suisse's Oppenheim touched on this point in his earnings preview released Monday morning:
"We think orders fell 6%, and expect cautious commentary about slowing orders in Sept. and into Oct. given RYL's first-time buyer focus and conservative spec policy, which would limit the product available to sell and close by Nov. 30."
The other topic that will have analysts cupping their ears as management hosts its 3Q2009 earnings call on Thursday is the land market. The volume of land transactions in select markets picked up in the summer months, with reports of multiple bids on choice finished-lot parcels driving up prices. Given Ryland's conservative land strategy vis à vis many of its peers, analysts will be clamoring for more color on the deals that are out there.
As Citi analyst Josh Levin noted in his mid-quarter note in August: "Relative to some of its peers, RYL strikes us as somewhat more circumspect about the availability of land opportunities which public homebuilders will face in the next 12-24 months. RYL cited an example of a recent auction of developed lots in SoCal. 25 entities (~50% homebuilders, ~50% investors) bid on the lots. Another public homebuilder won the auction at $125k per lot, a price RYL does not think makes economic sense. RYL also noted that the winning bidder was unable to use an option take-down agreement but instead is doing a more cash intensive bulk purchase. RYL believes that 18-24 months out homebuilders will need to start developing dirt."