Ryland Cuts Costs in Weak Market

The Ryland Group, Inc. (RYL - Snapshot Report) reported a loss of $5.70 per share in 2Q08, worse than a loss of $1.25 per share in the prior-year, due to a decline in sales and margins as a result of the slowdown in the U.S. housing market. For the remainder of this industry downturn, we expect the management to focus on generating cash flow, lowering inventory, reducing land investment and shedding overhead costs.

We expect gross margins to remain under pressure due to weaker average selling prices, heightened incentive use, and accelerated option write-offs. We recommend investors to Hold shares of RYL.

Ryland has sufficient liquidity and cash generating ability to get through the remainder of 2008. In June, the company amended its revolving credit facility by reducing its borrowing capacity from $750 million to $550 million and by modifying several of its covenants, which included decreasing the base amount of its minimum consolidated tangible net worth covenant to $600 million, adjusting the permitted leverage ratio and the ratio of unsold land to its consolidated tangible net worth and changing its pricing structure. There was no change in the facility's maturity date of January 2011.

Ryland needs to reduce its COGS [cost of goods sold] to stave off further margin deterioration from price concessions and heightened incentive use. Fortunately, RYL has the luxury of economies of scale, whereby it can squeeze suppliers and subcontractors for lower prices.

However, the macro environment for housing remains challenging. Mortgage lenders have enacted tighter lending standards. The company reported a decline in 1H08 average closing price to $255,000 from $295,000 a year ago. Average price on homes in backlog at June 30, 2008 was $258,000 compared to $294,000 a year ago.

Read the full analyst report on RYL

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