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Four analysts and top management from ten sector firms examine the HomeBuilders Industry sector in this special 64-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info400.htm

TWST: Scott, what’s been most striking about the performance of the homebuilders over the past 12 months, the companies as well as the price performance of the stocks?

Mr. Campbell: During the first six months of that period, the stocks performed extremely well from a price performance perspective, driven by solid financial results, as well as by extremely compelling valuations relative to historical levels. In February 2000, when the recent rally began to gain momentum, the group was trading at roughly 5 times forward EPS estimates and, in several cases, 20%-25% below book value. Given the sector’s historically low valuations, rising earnings estimates and the perception of a declining interest rate environment, investors flocked to the group as the year progressed. On average, the group rose approximately 80% in 2000. We estimate 75% of the increase was a function of multiple expansion, with rising EPS estimates accounting for the balance. Since January 1, we’ve been pleasantly surprised at how well housing activity has held up in the face of declining economic fundamentals, especially falling consumer confidence and rising unemployment. I think that’s a testament to not only the favorable demand/supply relationship in the overall market, but also to several unique dynamics and secular shifts that have been taking shape in the sector for the last five years or so. Unlike 2000, a majority of the price movement thus far in 2001 appears to be earnings-related versus multiple expansion.

TWST: Scott, turning to the valuations, what do the current valuations of the homebuilding stocks suggest? And why don’t the valuations reflect the returns that the companies have been showing?

Mr. Campbell: Current valuations across the group of 12 builders that we track are averaging a p/e multiple of roughly 7.5 times 2001 estimates; then as we look out to 2002, the group is trading at roughly 7 times 2002 numbers. Historically, when multiples are at these levels, it suggests an imminent decline in housing activity, followed closely by a significant earnings decline for the homebuilders. Unfortunately, the market has had that view since 1996, with the exception of a 12-month period between late 1997 and late 1998, when p/e multiples last reached the mid-teen level. Basically, the group was largely ignored by investors up until March of last year despite posting pretty impressive earnings growth and consistently improving return metrics, including return on equity and return on invested capital.

TWST: Scott, is there another that you’d like to tell us about?

Mr. Campbell: I would echo all the comments that were made on Lennar (NYSE:LEN). I would echo Sam’s thoughts on Ryland (NYSE:RYL). Chad Dreier, who has been at the helm since 1993, has done a phenomenal job turning the ship around. What’s really impressive is that all of the growth over the last five to six years has been internally generated. They’ve had a long way to go, and he’s essentially brought them all the way back. Ryland is really a unique small cap builder, again using the billion-dollar market cap definition, in that they are the only builder in this segment that has a true national footprint, with operations in 14 states and roughly 21 markets. I think that because of that national footprint, they will pop up on a number of radar screens as we go forward, particularly as the consolidation process continues to play out. It’s a builder that overlaps very well with a number of large cap competitors. Minus consolidation, Ryland’s financial prospects on a standalone basis also look bright.

This special issue includes:

1) HomeBuilders Industry - In an in-depth (15,000 words) Analyst Roundtable, Scott H. Campbell, Vice President at Raymond James & Associates, Samuel A. Lieber, CEO/ Portfolio Manager at Alpine Management & Research LLC, Carl E. Reichardt, Principal at Banc of America Securities and Joseph Sroka, Vice President at Merrill Lynch, examine the outlook for the sector including, varied mortgage products, tightness of supply and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at ten sector firms asked market insiders about the ability of management teams to create shareholder value.

3) CEO interviews (average 2,500 words). Top management of ten sector firms examine the outlook for their firm and the sector.