Ryland's gross margins perk up Homebuilding segment helps send net income to $939,000 in quarter

April 26, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

In what analysts described as a significant harbinger, the Ryland Group Inc. yesterday reported net income of $939,000 for the first quarter, largely because its homebuilding segment generated its first profit in the three months ended in March since 1989.

Just as important as the 36 percent earnings gain from the year before, the Columbia-based company's results indicate that it is finally beginning to execute a long-stated strategy aimed at improving its homebuilding operations, analysts said.

"We are focusing on improving the margin of each unit we close, rather than increasing the volumes of homes we sell," said R. Chad Dreier, Ryland's chairman and chief executive.

"We believe this is the key to achieving our goal of restoring long-term profitability of our homebuilding operations."

Ryland's gross profit margins averaged 13.6 percent in the quarter, a 16 percent increase from a year ago and the third consecutive quarterly gain.

In all, Ryland's homebuilding segment generated pretax earnings of $1.3 million, reversing a $4.3 million loss in the same period in 1995.

Revenues for the segment declined 4.5 percent to $298 million, a figure that the company attributed to a lower number of closings resulting from inclement winter weather.

The company closed on 1,733 units, a decline of 13.2 percent, but at the same time the average closing price was rising by 8.2 percent, to $170,000.

Ryland also generated a backlog of 3,414 outstanding contracts with a value of $608 million as of March 31, increases of 9.6 percent and 17.4 percent, respectively, from the prior year.

"The fact that their gross margins improved that significantly is very positive," said Matthew V. Roswell, a Legg Mason Wood Walker Inc. analyst who tracks Ryland. "Because, when gross margins are up, it means there's more money on each unit sold.

"This was a 'show me' stock, and now they're starting to show me."

Mr. Roswell added that he was raising his 1996 earnings estimate for Ryland to $1 a share from 85 cents a share.

But not every analyst was as enthusiastic.

Ivy Schneider, a Salomon Bros. Inc. analyst in New York, said that, while Ryland's improvement was impressive, it was not enough to warrant a buy recommendation for the company's shares.

"In a down industry overall, I would suspect that, unless they can get their sales volume up dramatically, it will be difficult to produce sustained improvement relative to their overhead costs," Ms. Schneider said.

As Ryland had projected, its share of new orders in the mid-Atlantic area fell 40 percent from the comparable quarter last year, resulting in a 6.1 percent drop overall. The company had said last year that it intended to focus elsewhere to boost sales.

Ryland's financial services operation also produced inferior results because of lowered earnings from investments.

The 42 percent drop in pretax earnings to $3.2 million overall was offset, however, by a 73 percent gain in its retail mortgage earnings, to $1.9 million.

Ryland's common stock fell 50 cents yesterday, closing at $16.25.

Pub Date: 4/26/96

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