Ryland facing turning tides after ride atop interest wave.

Few companies have ridden the residential real estate wave as well as Ryland Group Inc.

With low interest rates driving home sales nationwide, the Calabasas-based homebuilder set all-time records for both revenues and net income in 2003, selling a record 4,400 homes in the fourth quarter alone, a 7.4 percent increase from the year-earlier quarter.

The value of Ryland shares, which traded at about $77 each last week, has doubled in the past 12 months, easily trumping the 50-plus percent jump L.A. based home-building giant KB Home.

Whether that tide is about to roll out depends on whom you ask.

With the Federal Reserve's late January declaration that it would be "patient" on adjustments to short-term interest rates, a change from its previous position that rates would remain low, homebuilder stocks took a hit across the board, with Ryland dropping $4.17, or 5.2 percent, Jan. 28.

While the stock has since rebounded, the company has sent signals that the long ran-up may be losing a little steam. It reported that new home orders during the fourth quarter were down 8.9 percent from the year-earlier period. That was the sharpest decline recorded in a survey of 16 large homebuilders conducted by Bloomberg News. On the year, Ryland's new home orders were up 9 percent, according to the survey.

As a result, the stock may not have a lot of upside left, according to a Jan. 22 report by David Weaver, vice president at Baltimore-based Legg Mason Wood Walker Inc., which owns 3.6 percent of Ryland's outstanding shares. Weaver maintained a "hold" rating on the stock.

"We do not see a catalyst to move valuations significantly higher," Weaver said in the report. "We expect mortgage rates to move higher and we think that will slow the overall housing market. We believe many builders will find it difficult to match their recent record growth rates in the quarters ahead."

Raising the bar

Ryland set the bar high last year, breaking records in both its homebuilding and mortgage origination businesses for both the fourth quarter and the year.

The $231,000 average closing price in the fourth quarter of a Ryland home was 6.5 percent higher than the year-earlier period, and it closed on 7.4 percent more homes than in the fourth quarter of 2002. It performed particularly well in San Diego and Riverside counties and in the mid-Atlantic states and Florida, according to Gordon Milne, its chief financial officer.

Overall, Ryland sold 15,197 homes last year, up 9 percent from the 13,936 sold in 2002.

As a result, Ryland reported net income of $86.1 million for the fourth quarter ended Dec. 31, compared with $67.5 million for the like period a year earlier. Fourth-quarter revenues were $1.1 billion, vs. $929.7 million.

Despite signs that home sales may not be able to maintain their torrid pace, the company projects a 10 percent jump in earnings per share for 2004.

"We're starting the year in a very strong position to have an up year," said Milne, noting that anticipated revenues from Ryland's backlog (homes under contract but not closed) as of the end of the year is 24 percent more than at the end of 2002. "We're seeing good margins in that backlog."

As for the fourth quarter drop in new home orders, Milne attributes the decrease to a lagging housing market in Texas. Ryland has 22 new home communities in the Dallas/Ft. Worth area and 23 in and around Houston.

"The economy is not as strong in Texas," said Milne. "And on the two coasts, you're supply constrained. In Texas, you're not, so there is more competition."

Ryland's stock has increased 10-fold in the past three years, while KB Home has risen more than three-fold and the Dow Jones Industrial Average has been about even. Its price/earnings ratio of 8/1 compares to KB's 7.7/1.

While Weaver projected Ryland earnings per share figures to increase by 11 percent in 2004 due to increased home deliveries, as well as recent stock repurchases on the part of the company, he doesn't expect the recent stock run-up to continue.

"The wind behind the builders in the form of falling rates may not be there much longer," Weaver's report said. "The builder's cost of funds is at an all time low."

Still, Milne remains rosy about the stock's prospects.

"We have a pretty good track record of hitting earnings estimates," he said. "We're very inexpensive by Wail Street standards.

Ryland Group Inc.

Stock Prices

YEAR (Dec. 31)                     2003 *        2002

Revenue (millions)               $3,444.1    $2,877.2
Total Expenses (millions)         3,047.9     2,587.9
Operating Income (millions)         396.2       309.3
Net Income (millions)               241.7       185.6
Earnings Per Share                  $9.11       $6.64

* Unaudited