Ryland stock up as earnings dip

Donald Saltz

February 14, 1992|By Donald Saltz

This week, the Ryland Group moved in a contradictory manner. The company, headquartered in Columbia, reported lower home sales and sharply lower earnings but decided to sell 2.5 million new common shares to boost the total by 20 percent. And, despite the recession in the housing industry, Ryland's share price, $27.50, is hovering near its best level since the mid-1980s.

In offering to sell new shares, Ryland is taking advantage of its high stock price and a good market for offerings. The money will be used for expansion and debt repayment, and the sale is inexpensive to the company, which will pay only a 60-cent dividend on each share, or just over 2 percent.

Actually, Ryland, one of the top three homebuilders in the nation, is doing better than the sales and earnings numbers indicate. Ryland is profitable despite sluggish sales.

A good part of the year's problems can be attributed to nature and not the economy: Unstable soil at a large California building site cost the company a $13 million charge in the fourth quarter.

On the other hand, Ryland finances about four of every five homes it builds, and the company's financial unit services a large number of mortgages. That business's earnings last year were triple those in 1990.

In a good year, and there were good years in the '80s, Ryland has earned more than $3 a share. Its share price of $27.50 would give it a price-earnings (P-E) ratio of between 8:1 and 9:1 when stacked up against those earnings of $3 a share or more. Investors, who have bid up the share price from $17.75 in December, are looking ahead to an end to the housing slump and a resumption of strong earnings for top companies such as Ryland.

Based on current earnings of 52 cents a share, Ryland stock is selling at a P-E of more than 50:1, but remember, the market reflects the future.

Next month, Ryland celebrates its 25th year in business. Its assets are about 2 1/2 times its liabilities, and it has weathered these tough times in the housing industry rather well. Even though earnings have been down for several years, the company has not gone through a deficit year.

Weak stocks recover

There has been a subtle recovery for some of the downtrodden giants, stocks such as USF&G and MNC Financial, both of Baltimore, and Black & Decker of Towson.

B&D reported slightly higher sales in its fourth quarter, but earnings more than quadrupled and the stock price hit a new high for several years.

USF&G's share price has also gained on an improved earnings picture, and MNC Financial is being viewed as a company whose worst problems are past. MNC also is looked upon as a possible takeover target.

Stock market history shows that most big-name stocks that have declined sharply because of special circumstances come back. An investor might do well to buy several such stocks, thus avoiding putting all his eggs in a single basket while gambling that a majority will recover.

It is also beneficial to the investor to buy stocks with dividend yields better than typical ones in shorter-term fixed-income investments. These days that means a yield of perhaps 4.5 percent. The yields provide a floor under the share price, and although they don't guarantee a decline, they tend to limit any fall in price.

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