Homebuilders Such as Ryland Make Bet on Once-Dormant Florida City

NEW YORK (TheStreet) -- A small planned city near Tampa, Fla., illustrates how U.S. homebuilders M/I Homes (MHO), Ryland Homes (RYL) and Taylor Morrison (TMHC) are betting on a rebound in the economy and a resurgent housing market.

The city is Connerton, located in the center of Pasco County, Fla., about 25 miles north of Tampa, and I've been watching its evolution over the past five years.

New housing activity began in early 2013 with four homebuilders, including the the publicly traded ones mentioned above, building their models. I attended the grand opening around Memorial Day in 2013.

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Last week, two other well-known U.S. homebuilders, Lennar (LEN) and KB Home (KBH), reported better-than-expected quarterly earnings, which prompted me to revisit Connerton to get a read on how the city was progressing.

I become interested in the Connerton story in mid-2009 after my son and I bought a Standard & Pacific (SPF) model home in a community of approximately 960 homes that borders on Connerton.

The original developer of Connerton bought the 8,000-acre Conner Ranch in early 2000 and planned to build more than 15,000 homes around three golf courses, but 3,000 acres of beautiful countryside were later set aside for conservation.

A second plan called for 8,600 homes, 1.7 million square feet for retail, another 1.4 million square feet for offices, a government center, a school system and a hospital. In other words, Connerton would become a complete city amid the beauty of Florida.

Then in 2007 the housing bubble burst. Only 280 single-family homes in Connerton had been sold. The 10,000- square foot Club Connerton was in place, the hospital was nearly complete and the elementary school was under construction. (It was completed a couple of years ago.)

In 2010 a new developer took over the project, but it took nearly three years before the new grand opening.

During my recent visit I spoke to representatives of each of the four homebuilders at their model homes. Their stories were similar. Each has been selling two to three new homes per month with one-third being of them being sold for cash. The price of a new home is up about 5% year over year, and each builder is building two or three homes on speculation and two or three under contract.

Ryland has the cheapest homes, with square footage between 1,481 and 2,271 priced at $191,990 to $240,990. M/I Homes are offered in a range of 2,164 and 3,111 square feet and are priced from $247,990 to $285,990.

HOA & CDD fees are based upon frontage of property footage: Fifty-five feet costs $219.49 per month or $2,633.89 per year. At 75 feet, monthly HOA/CDD fees are $268.56 per month or $3,222.75 per year. These fees are higher than in my community.

After visiting the model homes I went to Club Connerton and learned that 70 new families have been using the club's facilities over the last 12 months, which is in-line with the sales data.

To verify some of the home price data I went to the Pasco County Property Appraisal office. A home on our street and of the same model as ours sold in April at $272,000. The lady in the appraisal office showed me how to find similar sales in the area on the county Web site.

Our home has a ground-floor square footage of 2,128. Two comparable recent resales in Connerton sold for $262,800 and $265,000.

The bottom line is that progress is being made on home sales, but nationally, single-family housing starts are still at a pace that's about 60% of normal.

Following are the trading profiles for the three publicly traded homebuilders in Connerton.

M/I Homes ($24.38) does not report quarterly results until July 24, and analysts expect the homebuilder to report earnings per share of 30 cents. The stock is down 4.2% year to date but is above its 21-day, 50-day and 200-day simple moving averages at $23.28, $22.76 and $22.47, respectively.

The weekly chart is positive with its five-week MMA at $23.35. This week's value level is $23.51 with semiannual and monthly risky levels at $25.87 and $26.75, respectively.

Ryland Group ($39.90) does not report quarterly results until July 23 and analysts expect the homebuilder to report EPS of 70 cents. The stock is down 8.1% year to date. The stock is above its 21-day and 50-day SMAs at $38.38 and $38.07, respectively, but failed at its 200-day SMA at $40.21 on Tuesday.

The weekly chart is positive with its five-week MMA at $38.74. Weekly and semiannual value levels are $37.25 and $35.95, respectively, with monthly and semiannual risky levels at $41.69 and $44.96, respectively.

Taylor Morrison ($22.71) does not report quarterly results until August 12 and analysts expect the homebuilder to report EPS of 35 cents. The stock is up 1.2% year to date and is above its 21-day, 50-day and 200-day SMAs at $21.34, $21.24 and $21.97, respectively.

The weekly chart is positive with its five-week MMA at $21.74. This stock has only been publicly-traded since April 2013 and this week's value level is $20.58 with a monthly pivot at $22.08.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates RYLAND GROUP INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate RYLAND GROUP INC (RYL) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, notable return on equity and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk, weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 17.4%. Since the same quarter one year prior, revenues rose by 30.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Household Durables industry and the overall market, RYLAND GROUP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • RYLAND GROUP INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, RYLAND GROUP INC increased its bottom line by earning $6.81 versus $0.84 in the prior year. For the next year, the market is expecting a contraction of 56.3% in earnings ($2.98 versus $6.81).
  • Net operating cash flow has significantly decreased to -$25.06 million or 204.17% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • Currently the debt-to-equity ratio of 1.53 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated.

TheStreet Ratings team rates M/I HOMES INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate M/I HOMES INC (MHO) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, notable return on equity and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MHO's revenue growth has slightly outpaced the industry average of 17.4%. Since the same quarter one year prior, revenues rose by 23.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Household Durables industry and the overall market, M/I HOMES INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • MHO's debt-to-equity ratio of 0.85 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further.
  • The gross profit margin for M/I HOMES INC is rather low; currently it is at 22.14%. Regardless of MHO's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, MHO's net profit margin of 5.37% compares favorably to the industry average.
  • Net operating cash flow has significantly decreased to -$2.10 million or 124.57% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

Richard Suttmeier is the chief market strategist at ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

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