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Ryland Group's Q2 Earnings Beat, Rev Lags

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The Ryland Group Inc.’s adjusted net earnings of 80 cents per share in the second quarter of 2013 surpassed the Zacks Consensus Estimate of 64 cents by 25% and the year-ago earnings of 14 cents by a huge margin. The earnings upsurge was driven by top-line growth and margin expansion.

Total revenue of $493 million lagged the Zacks Consensus Estimate of $498 million by 1.0%. Reported revenues climbed 67.8% year over year, driven by better pricing power and volume growth amid improved market conditions.

Ryland Group is one of the largest homebuilders in the U.S, with operations in 14 states. Like other homebuilders such as Lennar Corporation (LEN - Free Report) , PulteGroup Inc. (PHM - Free Report) and D.R. Horton, Inc. (DHI - Free Report) , Ryland has been gaining momentum from the strong recovery of the U.S. housing market. Homebuilding revenues of $478 million climbed 68.0% year over year on the back of a double-digit increase in the number of homes closed and average selling price.

Net sales orders in the quarter totaled 2,191 homes, up 56.7% from the prior-year quarter, bolstered by increased demand during the quarter. The value of net orders grew 77.9% to $676.7 million, driven by an increase in volume and the number of active selling communities. The company witnessed 24.4% year-over-year increase in active communities to 260 communities during the quarter.

Home closings were up 48.8% to 1,659 homes in the reported quarter compared with 1,115 homes in the year-ago quarter. The company intends to maintain volume growth by focusing on sales in the existing communities and by increasing community count.  Average closing price increased 13.0% to $287,000 during the quarter due to favorable changes in product mix, lower incentive levels and higher pricing. The increase in average closing prices was highest in Southern California, Las Vegas, Houston and Charleston.

The quarter-end sales order backlog rose 61.0% to 3,667 homes from 2,277 homes at the end of the second quarter of 2013.

With the housing market gaining momentum, most homebuilding companies are investing in building more homes to meet the growing demand.  The Ryland Group is also aggressively investing in land and development in order to build more homes. The company spent $176 million on land acquisition and $62 million on site development in the quarter.  

Housing gross profit margin improved 170 basis points to 20.4% during the quarter, driven by a decline in construction costs and leverage from direct overhead expenses. Selling, general & administrative (SG&A) expenses declined 400 basis points to 12.3% of homebuilding revenues due to higher leverage resulting from revenue growth.

The company reported 34.2% increase in homebuilding pretax earnings to $43.8 million in the second quarter of 2013 attributable to higher volume, expansion of housing gross profit margin and a decline in selling, general and administrative expense ratio.

Financial services reported 63.0% increase in revenues to $15.0 million in the quarter. The segment reported 162.1% increase in pretax earnings to $7.6 million due to increase in the locked loan pipeline, higher origination volume and increased title income.

Fiscal 2013 Outlook

The company expects further expansion in gross margin in the upcoming quarters on the back of declining lumber prices. The company expects total land expenditure to exceed $700 million for full year 2013. The company expects to end the fiscal year with 25% more communities compared to the prior year.

Ryland Group carries a Zacks Rank #1 (Strong Buy).

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