Homebuilder and Motley Fool Hidden Gems pick MDC Holdings (NYSE:MDC) will report Q4 2006 financial results on Jan. 25, possibly hammering home another nail in housing's coffin.

What analysts say:

  • Buy, sell, or waffle? Of the eight analysts covering MDC, half have a hopeful buy rating on it, three say hold, and one says sell.
  • Revenues. Revenues are forecast to drop 33% year over year, to $1.16 billion.
  • Earnings. Profits are also expected to get walloped, dropping 76% to $1.03 per share from the $4.28 posted last year.

What management says:
MDC's management has been carefully monitoring the housing slump and has exiting from land contracts that were no longer profitable in the current environment. Since the beginning of 2006, it has exited from a quarter of its contracts, while in the third quarter alone it reduced the value of its land holdings by $100 million, contributing some $70 million to operating cash flow.

CEO Larry Mizel noted that MDC has "continued to reduce the number of our lots controlled to maintain a level more consistent with our two-year supply objective." By keeping just a two-year supply of land on hand, it becomes less affected by severe housing downturns.

What management does:
Less affected doesn't mean unaffected. In fact, you can see in the chart below that as the housing crisis worsened, reducing operating expenses was essential to keeping a semblance of normalcy, but it couldn't be stopped in the third quarter. As a matter of fact, comparing the margin erosion at MDC to builders Lennar (NYSE:LEN) and Beazer (NYSE:BZH) -- one has already reported, and one is set to report next week, too -- the fall-off was more extreme at MDC.

That reflects that MDC started feeling the slowdown beginning in last year's third quarter when cancellations first crossed 25% (jumping up to 48% in Q3 2006), followed by new orders falling for the first time by 10% in the fourth quarter. While it was still able to raise the average selling price throughout much of the year -- in contrast to Lennar which began to aggressively cut prices -- it had to offer more incentives to buyers to get them to close.

Margin %

09/05

12/05

03/06

06/06

09/06

Gross

36.1

29.5

29.3

28.1

26.8

Op.

16.3

16.8

16.5

15.2

13.7

Net

10.0

10.4

10.1

9.3

8.0
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
MDC Holdings has certain factors that may help it weather the storm a little better than some other builders, as it has some $132 million in cash in the bank, with total cash and borrowing capacity of more than $1.3 billion. But it's definitely not immune, and while the stock has performed admirably during the worsening situation (off only 11% over the past year), it has managed to rise more than 25% from the depths it reached at the end of the third quarter. It's actually done better than virtually all of the competition.

Yet considering the dilapidated state of the housing market today, I'd be hard pressed to find a firm foundation upon which to make an investment here as things look to get worse before they get better.

Competitors:

  • D.R. Horton (NYSE:DHI)
  • Pulte Homes (NYSE:PHM)
  • Toll Brothers (NYSE:TOL)
  • Ryland Homes (NYSE:RYL)

Related Foolishness:

MDC Holdings has earned a three-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

MDC is also a recommendation of Motley Fool Hidden Gems. A 30-day guest pass gives you inside access to see why this builder might just be different than all the others.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.