California-based The Ryland Group is set to report its 2Q2009 earnings after market close today. Top of mind for housing analysts and other key stakeholders is whether the company got any lift from the surprising 11% jump in new-home sales in June as compared to May, which the Commerce Department reported Monday.
Last quarter the company's new order count came in ahead of estimates and since then many of the company's peers--including KB Home, Lennar Corp., Standard Pacific Homes, and most recently Meritage Homes--reported better-than-expected new order trends during their fiscal second quarters.
But the big question is whether any surge in new-home demand will get the company any closer to profitability.
Despite encouraging new order trends during 1Q2009, the company had a rather disappointing earnings performance, which culminated in a net lost of $75.3 million, or $1.76 per share. For 2Q2009, Wall Street consensus is that the company will lose an average of $1.04 per share on $304.9 million in revenues.
Last quarter, company executives blamed foreclosures, the close out of a number of communities, and spec sales for contributing to margin compression; gross margins for the quarter were 6%, excluding impairments and other charges, which one analyst characterized as "unusually depressed."
The market's appetite for spec homes--many builders are reporting that spec sales account for on average about half of their sales--likely will temper significant margin improvement. Analysts expect to see some improvement in gross margins, with the company bringing them up to anywhere from 7.5% to 9.0%, by some estimates, in 2Q2009.
However, if takeaways from the Meritage earnings call earlier this week are any indication, the company could begin to reverse its spec strategy to capture more sales, particularly with time running out for buyers to take advantage of the $8,000 federal first-time home buyer tax credit. Last quarter the company's spec count totaled 501 specs, or roughly one per community, which was down 22% from the previous quarter.
The other major hit to profitability during 1Q2009 were impairments, charges, and joint venture write-offs totaling $49.4 million. Several analysts expect that balance sheet charges will continue this quarter, resulting in greater than expected losses. Analyst Dan Oppenheim with Credit Suisse, for one, estimates that the company will see a loss of $1.12 per share, driven mostly by $55 in charges. Wells Fargo analyst Carl Reichardt expects charges of $25 million to contribute to a $1.10 per share loss.
On the more positive side, most analysts expect SG&A as a percentage of revenue to continue to improve, with some estimates coming in as low as 14.0%. Last quarter, SG&A including severance and model abandonment charges was 15.6% of revenues, compared to 16.0% from the same period in 2008.
Although the company has some significant hurdles to getting back in the black, its balance sheet remains fundamentally strong. The company counted $534.0 million in cash on its balance sheet and had a net debt-to-total cap of 22.0% at the end of 1Q2009.