Homebuilder Ryland (NYSE:RYL) will report Q4 2006 financial results on Wednesday, Jan. 24. Here's a look at how things are being torn down.

What analysts say:

  • Buy, sell, or waffle? Not surprisingly, sentiment is turning against Ryland, with four of the 12 analysts saying sell, six saying hold, and two saying buy.
  • Revenues. Quarterly revenues are expected to fall to $1.14 billion, down 25% from the $1.5 billion built up the year before.
  • Earnings. Earnings are also expected to take a hit, falling 44% to $1.84 per share.

What management says:
Management admits it's a tough environment right now for the homebuilding market, with declines in the number of closings it has, the selling prices on its homes, and new orders. Closings were off 3% sequentially in the third quarter, while new orders were down 23% from the second quarter. Even as Ryland has taken to lowering the average selling price of its houses -- down to $291,000 from $295,000 the quarter before -- the cancellation rate is skyrocketing, up to 42.5% in the last quarter alone.

Not surprisingly, analysts aren't putting much faith in management's forecast for the year. Although the company reaffirmed earnings guidance -- translating into quarterly earnings of $1.89 to $2.39 per share -- Wall Street has lowballed it with expectations of $1.84 per share.

What management does:
As the housing slump worsened this year, it's apparent that Ryland attempted to preserve its margins in the weakening market. But faced with aggressive maneuvers by some of the other homebuilders, it had to join the fray of adding amenities and cutting prices. The impact on margins became apparent in the third quarter, and while some hope that the worst may be over, many do not expect this to be a "soft landing" for housing.

Margin %

09/05

12/05

03/06

06/06

09/06

Gross

25.0

25.9

26.1

26.1

25.0

Op.

14.2

15.1

15.4

15.3

14.1

Net

8.7

9.3

9.5

9.2

8.8
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
While the industry is certainly slowing, what we're seeing is that the rate of decline is actually accelerating. That would suggest things need to get worse before they get better. With the average price of a home actually declining for Ryland, it's putting the lie to the myth that real estate always goes up in value. More desperately, Ryland felt the need to resort to comical gimmicks to try to preserve the facade of selling homes: discounts on closing costs, teaser rates on loans, etc. And these don't even show up in the closing price of homes.

Home building is a cyclical industry. In trying to preserve the halcyon days of the past few years, it seems everyone from builders to brokers to real estate agents is trying to jawbone the industry into a soft landing. Play like it's not happening, and it won't. Reality, though, seems to be different, and Ryland looks to be a conventional builder that will be under the weather until the industry rebuilds itself.

Competitors:

  • Beazer Homes (NYSE:BZH)
  • Centex (NYSE:CTX)
  • DR Horton (NYSE:DHI)
  • MDC Holdings (NYSE:MDC)

Related Foolishness:

Ryland has earned a one-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

MDC Holdings is a recommendation of Motley Fool Hidden Gems. See why the top small-cap investing service thinks this homebuilder is still a winner by checking out the service with a 30-day guest pass.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.