Ryland raises roof after turnaround

Builder: Ryland Group's earnings report this week is expected to exceed estimates, underscoring the homebuilder's rebound.

April 18, 1999|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Chad Dreier didn't have to rely on numbers that showed the Ryland Group Inc.'s sales had hit an all-time quarterly high at the start of this year to know that the Columbia homebuilder's long and at times grinding turnaround had finally taken hold.

Dreier, Ryland's chairman and chief executive officer, realized the company had turned the corner when he was approached by a competitor at an industry conference in New York late last month.

The homebuilder said he wanted to work with Ryland to build homes in a new community. Four years earlier, that same competitor, who Dreier declined to name, had refused to even consider working with the company, describing it as "dead."

The encounter left an indelible impression on Dreier, who has been working to right the Ryland ship since taking the company's top job in November 1993.

"We had a management meeting at the end of March in which I formally declared victory," Dreier said.

Dreier is likely to cement the victory this week, when Ryland announces first-quarter earnings that are expected to shatter even the most optimistic Wall Street estimates.

Its profit in the quarter that ended March 31 are expected to top $7 million, according to a consensus estimate from investment houses tabulated by First Call Corp., though some analysts predict that the numbers could be far higher.

At $7 million, Ryland's net income would nearly double its numbers of the first quarter of 1997, and represent a more than three-fold increase from the $1.7 million of two years ago.

"We're entering the next phase of our corporate life, and our numbers speak for themselves," Dreier said.

Ryland's first-quarter sales -- up 13 percent from a year ago to 2,980 homes -- come on the heels of fourth-quarter earnings that surged 84 percent to $17.6 million, or $1.12 per share.

But just as much as the numbers,

Dreier is proud of the attitude that has changed at Ryland.

"We've created a culture of success," Dreier said. "Ryland had lost that culture, that attitude of how to be successful, of how to be a winner, of how to make money. Success breeds success."

With the earnings' gains -- a healthy first-quarter performance would mark the sixth consecutive quarter of increases -- even Wall Street, much of which had scoffed at Ryland and predicted another fall, is taking notice.

"Most people felt their momentum would slack off, that their good news was behind them, that they would improve their gross profit margins to industry standards and stop there, that their earnings would flatten," said R. Bentley Offutt, president of Offutt Securities, a Hunt Valley investment firm.

"But it looks like they are going to have record first-quarter earnings, if the sales results are any indication," he said.

Analysts redo estimates

As a result, Wall Street is scrambling to reconfigure its estimates. Goldman, Sachs & Co., the New York investment house, has increased its projection from 20 cents per share to 50 cents per share, and others are following suit.

In addition to the new attitude, Dreier gives credit for the turnaround to the decision to overhaul three key areas: Ryland's people, Ryland's products and Ryland's philosophy on buying land.

"They should be credited," Offutt added. "They've reallocated assets to parts of the country that are selling, they've come up with better designs that are more open, and that's what people want. They've done an incredible job."

The nation's economy certainly hasn't hurt. Interest rates remain at historic lows, employment growth has continued unabated and consumer confidence is near an all-time high.

"Part of what they are experiencing stems from operating in a very hospitable marketplace," said Gregory A. Nejmeh, a housing industry analyst at Donaldson, Lufkin & Jenrette, a New York investment firm. "And I don't underestimate that.

"But I think in Ryland's case their turnaround is a combination of internal initiatives and a function of the market they're operating in," Nejmeh added.

Despite the sales and earnings gains, Dreier hasn't forgotten the recent past.

Painful memories

His memories include the time in 1996 when Ryland's stock plunged to $11 per share. Or to the time when the company paid $8.7 million in fines to settle felony charges that its mortgage company defrauded the federal government. Or to the time when Ryland took the unpopular step of slashing its dividend to investors from 15 cents to 4 cents. Or to the second quarter of 1997, when Ryland's profit fell 29 percent, amid one of the strongest home selling markets since World War II.

"The depths of the problems here were deeper than I expected," Dreier said. "In hindsight, what took four years to do we should have done in three."

And Dreier continues to worry, about interest rate spikes, war in Europe, the high-tech stock bubble bursting, environmental initiatives aimed at curbing new development and communities, labor, and a lack of available resources such as drywall.

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