Why This Builder Is Gung-Ho on Housing

The Ryland Group (NYSE: RYL  ) released guidance recently that may raise eyebrows among Doubting Toms on the durability of the U.S. housing recovery. For 2014, the company expects to grow its active community count by 15% to 343 coming from an anticipated 25% growth this year to 297.

It also sees its 2013 fourth-quarter homebuilding revenues at about $665 million and earnings per diluted share in the $1.10-$1.20 range. This would be a substantial improvement from the $440.1 million in revenues and $0.56 per diluted share the company saw a year earlier. 

Strong presence in market hotspots
Its firm grip of the hotspot markets appears to be what's driving Ryland's confidence that it can weather the headwinds on the residential real estate sector, such as the oft-cited rise in interest rates. This year's activities of the new real estate brokerage affiliate of Berkshire Hathaway (NYSE: BRK-B  )  highlight the vast potential in these growth markets and the sustainability of their recent gains.

This latest business venture of Berkshire Hathaway, the company of investment guru Warren Buffett, is Berkshire Hathaway HomeServices. BHHS has been rapidly expanding its network of affiliates, particularly in areas considered housing hotspots. Florida is one of the places it has zeroed in on, recently drawing into its fold Prudential Florida Realty. This wholly owned subsidiary of WCI Communities (NYSE: WCIC  ) has 40 offices covering 17 counties through some 1,400 agents. Besides Florida, Berkshire Hathaway HomeServices' network has penetrated California, Texas, and Washington, which are also Ryland strongholds. 

Local markets where economies are thriving
Economic growth above the national average in these key markets provides strong tailwinds to the fortunes of both Ryland and Berkshire HomeServices. For instance, Texas, which has the biggest share of the homebuilder's market at 19%, is among the top 10 U.S. states in GDP growth and expected job growth.

To tap future gains in these core markets, Ryland has been actively building inventory of lots under its control, which at the end of the third quarter of 2013, rose 49% on a year-over-year basis. Moreover, the company has made several key acquisitions in recent years. One of its most recent was the move-up homebuilder Lion Gate, which it acquired along with 747 lots, a move that further bolstered its market presence in the Dallas-Fort Worth market.

Sunshine State outlook bright
Florida, which accounts for 12% of Ryland's business, is another major source of future strength for the company. Notably, WCI Communities has been reaping excellent returns for its sole focus in the Sunshine State, which has also been cited as among the country's top 10 in expected job growth. In the 2013, third-quarter WCI Communities' revenues from homes delivered rose by 84% to $60.5 million, and adjusted EBITDA by 100.5% to $11.3 million.

Ryland, for its part, is further expanding its presence in Florida, where it's building in the 15 communities in the Tampa Bay area. One of its latest projects was the opening of a new section at its project in Ellenton. 

Marketing superiority
Ryland further bolstered its reputation in Florida, with the Tampa Bay Builders Association naming the company as its "Builder of the Year." The organization awarded this distinction based on the company's sales and marketing practices, as well as corporate social responsibility. 

One of the manifestations of Ryland's marketing strength is its mix of home offerings for entry level, first-time move-up, and second-time move-up home buyers. Significantly, the latter two segments combined constitute 67% of the company's market base, customers who are less sensitive to mortgage rate increases.

Final take
Ryland at its current share price level looks to be an attractive buy for investors seeking an equity position in the housing sector. Its stock currently has a trailing-12-month P/E ratio of just under 7, and it's trading at about 19% below its 52-week high of $52.40 set last May.

It appears there's more room to run for this company in the long term. The rosy guidance it painted is justified by the strong economies of its core markets. Moreover, it has the resources well in place, including a robust lot inventory and strong product portfolio mix, to ride out the cyclical ups and downs of the residential real estate market.

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