Housing sector

MDC Stock: Struggling Housing Sector May Present Opportunity

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“Don’t handicap your children by making their lives easier.” -Robert A. Heinlein

The last time we looked in depth MDC Holdings (NYSE: MDC) this summer, the outlook for the housing market has been much more robust. However, this part of the economy is taking gas as the average 30-year mortgage rate has risen from just over 3% at the time of our last article to 5.3% as we look back on this good homebuilder. market with more than 5%. dividend yield. A full analysis follows below.

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Company presentation:

MDC Holdings has operations/communities in Arizona, California, Nevada, Washington, Oregon, Colorado, Utah, Virginia, Maryland and Florida and is headquartered in Denver. The company was founded in 1972 and mainly sells under the American Richard brand. After the stock’s decline so far in 2022, the shares cost around $37.00 each and sport an approximate market capitalization of $2.6 billion.

First quarter results:

On April 28, the homebuilder released its first quarter results. GAAP earnings per share came in at $2.02, well above expectations. Net income increased 34% from the same period a year ago and gross margins improved 380 basis points to 25.7%. Revenue rose just over 19% year-over-year to $1.24 billion, about $20 million higher than consensus forecast.

Q1 2022 Highlights and Q1 2021 Comparisons

Revenue from home sales increased 19% from $1.04 billion to $1.24 billion

Unit deliveries, up 3% to 2,233

Delivery average selling price up 16% to $556,000

Homebuilding pre-tax income increased 66% from $113.5 million to $188.5 million

Home sales gross margin increased 380 basis points to 25.7% from 21.9%

Inventory write-down and warranty adjustment totaled $3.1 million in Q1 2022

Selling, general and administrative expenses as a percentage of home sales revenue (“SG&A rate”) improved 60 basis points to 10.4%

Net earnings of $148.4 million, or $2.02 per diluted share, up 34% from $110.7 million, or $1.51 per diluted share

Effective tax rate of 26.5% vs. 23.3%

Dollar value of net new orders increased 12% from $1.64 billion to $1.84 billion

Net order average selling price up 14%

Net unit orders fell 2% to 3,151

Dollar value of backlog increased 26% from $3.93 billion to $4.95 billion

Unit backlog increased by 11% to 8,558

Average sale price of lagging homes up 13%

It was a strong quarter throughout, as evidenced by the data points above. The only catch is that net orders fell 2%. Management has provided this commentary on its current outlook.

We continued to see strong demand in our residential construction divisions during the quarter, as evidenced by our sales pace of 5.4 homes per community per month. The combination of favorable demographics, strong local economies and historically low inventory levels in our markets has created an excellent operating environment for our business..

They also provided the following forward-looking guidance for fiscal year 2022.

2022 outlook and other selected information1, 2

Home deliveries planned for the second quarter of 2022 between 2,400 and 2,600

Average expected selling price for second quarter 2022 unit shipments between $560,000 and $570,000

Projected home sales gross margin for the second quarter of 2022 above 26.0% (excluding impairments and warranty adjustments)

Projection of home deliveries for the year 2022 between 10,500 and 11,000

Projected batches checked of 37,812 as of March 31, 2022, up 18% year-over-year

That said, the company has just announced that it is terminating its recently completed asset purchase agreement to acquire substantially all of the residential construction assets of The Jones Company of Tennessee, LLC. This entity closed just over 370 homes in FY21 in the Nashville area with average sales. price of $564,000, generating revenue of $209 million.

Analyst commentary and review:

The analyst community has become cautious about MDC in 2022. In early February, Wedbush lowered its price target from $63 to $56 per share while maintaining its Hold rating on the stock. Earlier this month, JP Morgan also maintained its Hold rating with a price target of $40.50 per share. At the end of April, Evercore ISI made to reiterate its outperformance but dropped its price target to $70 per share from $73 previously.

There has been little insider activity in the stock so far in 2022. The only insider trade so far this year was a sale of 3,000 shares by a director on May 3. Interestingly, less than four percent of the outstanding float is currently sold short. MDC Holdings’ balance sheet appears in good shape, with some $475 million in cash and marketable securities on the balance sheet versus just under $1.5 billion in long-term debt at the end of the first quarter.

Verdict:

The current analyst consensus the company earns just over $10.50 per share in fiscal 2022, with revenue growing about 15% to more than $6 billion. If mortgage lending remains at current levels or rises further, I expect analyst earnings estimates to fall in the homebuilding industry. That said, even if fiscal 2022 earnings are revised down to $9.00 per share, an investor is paying about four times forward earnings.

Homebuilders almost always trade at a significant discount to the overall market, but that valuation seems to factor in a ton of potential bad news. Also, it hasn’t been the large amount of overbuilding the country experienced before the housing crisis and subsequent financial crisis 15 years ago. Add to that a dividend yield of 5.4% on a very low payout ratio ($2.00/share per year), MDC appears to have an attractive valuation at current trading levels. I added to my MDC position via covered call orders, which allows me to earn a solid option premium as well as quarterly dividend payments.

“Don’t live the same year 75 times and call it a lifetime.” ―Robin S. Sharma

Bret Jensen is the founder and author of articles for the Biotech Forum, the Busted IPO Forum and the Insiders Forum