Homebuilder Ryland (NYSE:RYL) will report first-quarter 2007 financial results on Wednesday, April 25.

What analysts say:

  • Buy, sell, or waffle? Is Ryland becoming the darling of Wall Street once again? Four of the 11 analysts covering the homebuilder rate it a buy, while five say hold. Two home building inspectors rate it a sell.
  • Revenues. Last year's sales were 40% higher than the $637 million forecast for this quarter.
  • Earnings. Profits, on average, are expected to swing to a loss of $0.12 per share this quarter.

What management says:
Ryland was able to surprise the analyst community last time out, posting revenues and earnings shortfalls that were less than forecast. It also boasted an increase in the average price of houses sold, an anomaly among homebuilders shared perhaps only by Motley Fool Hidden Gems recommendation MDC Holdings (NYSE:MDC). This quarter, Ryland's chairman, president, and CEO Chad Dreier said results will be disappointing because "aggressive pricing strategies persisted in several markets." Ryland will be writing off the remaining goodwill it has and will take an impairment charge of about $65 million. As a result, it expects to report losses of $0.50 to $0.60 per share for the quarter.

What management does:
The heavy use of incentives for buyers to close on their contracts led to deterioration in margins. In its preannouncement release, Dreier said Ryland's sales were off 26% from last year, along with a 35% decrease in closings. Dreier's silver lining (in the storm clouds over housing) was that the cancellation rate had fallen a precipitous 28%, a marked improvement from the 49% rate recorded last quarter.

Margin

12/05

03/06

06/06

09/06

12/06

Gross

25.9%

26.1%

26.1%

25.0%

24.1%

Operating

15.2%

15.4%

15.3%

14.1%

13.6%

Net

9.3%

9.5%

9.2%

8.8%

7.6%
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:
The housing industry is still in a state of disrepair; encouraging signs like the lower cancellation rate ignore the fact that there just aren't as many people buying homes. Rather, with banks and lending institutions firming up mortgage qualifications, buyers in the market are more serious and more financially secure.

Even so, Ryland noted that without the impairment charge, goodwill writedown, and the resulting increase in its tax rate, it would have posted profits of $0.63 to $0.73 per share. Of course, those results would have benefited from previous inventory markdowns, just as future quarters will benefit from the writeoffs this time. Large markdowns are one way to get to profitability quicker and the results do not necessarily mean Ryland is any healthier than the rest of this ailing industry. I expect we'll see a decrease in prices too, just like competitors Hovnanian (NYSE:HOV), D.R. Horton (NYSE:DHI), and Beazer (NYSE:BZH) have all had to incur.

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. A 30-day guest pass gives you a free tour to find out why top analyst Bill Mann thinks this builder is different.

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.