Is it nuts to buy a homebuilder stock right now? Shares of
Ryland Group Inc.
) sold off after mortgage rates spiked on fears of Fed tapering,
but have since rebounded off of recent lows. It isn't for the faint
of heart. Yet this Zacks Rank #1 (Strong Buy) has excellent
fundamentals with double digit earnings growth and a forward P/E
below the market average.
Ryland is one of the largest homebuilders in the United States. It
operates in 14 states, including many of the key hot markets like
Southern California and the Washington DC metro area.
Ryland has also been aggressively buying land. Over the last 2
years it has spent nearly $1 billion buying land, including in the
lucrative Dallas market.
First Quarter Turnaround
If there was any doubt about the housing recovery, the first
quarter dispelled it. On Apr 24, Ryland reported first quarter 2013
revenue had jumped 73.6% from a year ago. More importantly, new
orders jumped 54.4% to 2,051 units from 1,328 units a year ago.
Backlog also rose 57.2% to 3,135 units from 1,994 units as of March
31, 2012. The average backlog price tells you how hot it is, as
that rose to $289,000 from $250,000 a year ago.
Unlike some competitors, Ryland is uniquely positioned in the
housing market to benefit from the move-up buyer both in price
point and product line. The move-up buyer is vital to the housing
recovery. She has historically been less price sensitive than the
first time buyer, which should boost Ryland's sales during a time
of rising mortgage rates.
Double Digit Earnings Growth Expected
Ryland lost money every year between 2007 and 2011 as the housing
boom became a bust. In 2012, the company saw improvement as it
managed to make $1.02.
Ryland is expected to see earnings growth of 189% in 2013 and
another 24% in 2014 as earnings are projected to jump to $3.65.
While it is quite the turnaround, it is a far cry from the housing
boom's peak in 2006 of $7.95.
It paid for investors to own the homebuilders in 2012, including
Ryland. Shares soared all year. The Homebuilder ETF (ITB) was the
best performing ETF of the year.
But 2013 hasn't been quite as rosy. Shares recently saw a sharp
sell off after the Fed and Ben Bernanke laid out a plan to taper
QE. Investors sold the homebuilder stocks as mortgage rates rose,
thinking that the sudden increase might put a damper on the housing
But so far, pending home sales are still at multi-year highs.
Ryland is expected to report second quarter results on July 24 so
there will be more guidance then.
Valuations Still Attractive
There's a myth that the homebuilders are now "expensive" relative
to where they were a year ago because the shares have popped.
Missing in that analysis is that the earnings are also rising,
making the shares of companies like Ryland still affordable.
Ryland has a forward P/E of just 13.2, which is under the average
of the S&P 500 of 14.7. It also has a price-to-book of just 3.2
and a solid price-to-sales ratio of 1.4.
Owning a homebuilder stock is no longer the risk it was in 2010 and
2011. But for investors, that's a good thing. It means rising
earnings and revenue growth for the next couple of years.
For those investors looking at all the homebuilders, Ryland is
certainly one to put at the top of the list.
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RYLAND GRP INC (RYL): Free Stock Analysis
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