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Seven analysts and top management from sixteen sector firms examine the homebuilding industry sector in this special 89-page Homebuilding Industry issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info506.htm

TWST: Will costs continue to be fairly benign, going through 2002?

Mr. Reichardt: It appears that way. For materials costs in general, we see little inflation in 2002, with the possible exception of drywall, where pricing is coming off an overcapacity driven cyclical low. The biggest, most important material cost for a builder, other than land, is lumber. We’ve had a seasonal pick-up in pricing early, as the nice weather has allowed builders to start more houses sooner than usual this year, broadly speaking. Most builders that we cover have contracts with framing subs or the yards for pricing that covers six to 12 months out, so they should have most of their lumber locked up for 2002 at reasonable prices. I don’t anticipate that having a big impact. Land prices remain firm in most of the country, but most construction material pricing is flat. In addition, a secular trend we’ve seen for the largest companies is their ability to buy materials on a per unit basis less expensively because they’re leveraging their scale with their distributors and their subcontractors to get lower prices. Most are working gradually toward buying direct from some national providers of certain building products, especially finished goods, which, of course, is going to lower their costs if they’re eliminating a step in the distribution chain. I think that has helped margins structurally, in addition to basically benign material costs in 2001.

TWST: And you are still recommending D.R. Horton (NYSE:DHI).

Mr. Reichardt: We still like D.R. Horton. Let me add one other company I want to talk about. We picked up Ryland Group (NYSE:RYL) recently, and among the small caps in the industry, it’s our favorite. Their market cap is about $1 billion. Our target is $107. Our estimates there are $9.80 for 2002 and $11 for 2003. This is a very conservative company that focuses on the affordable side of the market and on turning its inventory quickly. Turns run about 2.4 times, and the industry is about 1.5 times. That means that they limit their land risk, which we like. Ryland’s internal growth story is very strong. We believe the company can grow their top line at about 10% on a compound annual basis over the next four to five years, and that they’re going to be able to achieve that just through increasing their market share in existing markets. Ryland likely does not need to enter new markets or make acquisitions to grow their business. Again, they’re very conservative. Ryland’s structural margin improvement over the last three years has been outstanding. They’ve increased their per home operating returns around 50% over the last three years, but have only increased their selling prices 9%. So they’re in a position, we think, to really undercut their competition on price. Finally, we think Ryland is a very shareholder-focused company. They bought back almost 25% of their share base over the last five years, and they’ve got 1.6 million shares authorized now, with about 14 million outstanding. We think you’re going to see them active here, as they have been.

This special issue includes:

1) Homebuilding Industry - In an in-depth (13,500 words) Analyst Roundtable, Scott H. Campbell, Vice President-Homebuilding and REIT Equity Research at Raymond James & Associates, David Jarrett, Vice President at Credit Lyonnais Securities (USA) Inc., Samuel A. Lieber, CEO of Alpine Management & Research, LLC, Joseph Sroka, Vice President at Merrill Lynch & Co., Inc., James Wilson, Managing Director at Jolson Merchant Partners Group, LLC, examine the outlook for the sector including industry consolidation, interest rate outlook and share specific stock recommendations.

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

3) Outlook for Homebuilding Stocks - In an in-depth (5,000 words) Analyst Interview, Carl E. Reichardt, Principal at Banc of America Securities, examines the outlook for the sector including and shares specific stock recommendations.

4) Building Materials Manufacturers - In an in-depth (3,900 words) Analyst Interview, Robert Marshall, Senior Analyst following the housing/building materials sector at Wachovia Securities, examines the outlook for the sector including and shares specific stock recommendations.

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