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Recently initiating coverage on commercial and homebuilder The Ryland Group (RYL), Zacks senior construction industry analyst Mario Ricchio explains in his research report why he's giving the stock a Hold recommendation:
'The Ryland Group sells single-family detached homes, as well as attached homes such as townhomes and condominiums, to the entry-level, and the first- and second-time move-up buyers. For the remainder of this industry downturn, we expect management to focus on generating cash flow, lowering inventory, reducing land investment, shedding overhead costs, and squeezing suppliers.
'Despite these initiatives, gross margins should be under pressure due to weaker average selling prices, heightened incentive use, and accelerated option writeoffs. Given RYL shares trade at a big discount to book value, we believe the risks of asset write-down adjustments are factored into the stock.
'We initiate coverage of RYL shares with a Hold. Our target price is $21.25, or 0.6 times price/book. Historically, the homebuilders tend to bottom at 0.5x to 1.0x book value. We believe RYL's discount to book value reflects the risks of further asset write-down adjustments.'
Read the full analyst report on RYL
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