For once, Chicken Little had it right. The sky is falling ... at least on the housing market. Even MDC (NYSE: MDC), one of the biggest and baddest in the sector, with its impenetrable cash hoard and lean inventory level, is being pulled out with the industry tide.
Ouch.
The numbers were bad across the board. For the second quarter, MDC took a $167.5 million impairment and project-abandonment charge, a move that resulted in a net $106.1 million loss. The impairment charge was a result of a continued slump in the housing markets in California, Nevada, and Arizona. Total closings were 2,031, down 40% versus last year. Average selling prices fell $13,400 to $338,700, and gross margins fell to 14.1% from 23.3%.
Am I my competitor's keeper?
In the short term, a homebuilder's bargaining strength is determined by its weakest competitors. Whether it's the big guys like DR Horton (NYSE: DHI), Centex (NYSE: CTX), or Pulte (NYSE: PHM), or the more leveraged smaller players, if too many sellers flood the markets, then its tough for the more disciplined players not to get caught in the crossfire. MDC's management noted just such a problem -- it said it had to keep offering higher incentives or lowering prices to be competitive. And both eat into profit margins.
In the long term, though, the overhang will be work itself out and weaker players will fall away. However, the long term could be still a while away. MDC's management said it sees little or no improvement on the horizon.
However, the silver lining to the quarter's results was that MDC continued to strengthen and position itself for the future. Land lots were reduced by 15% to a very manageable 21,000 controlled lots, with only $23 million of at-risk deposits. The company generated $50 million in operating cash flow and ended the quarter with a $668 million war chest of cash to go to battle with.
MDC's management also noted that it's still trying to buy cheap land, but the difference between its bid and the sellers' ask is 10%-30%. Although no one knows when the housing cycle will turn, I'm pretty sure that MDC, thanks to its strong positioning, will be one of the first out of the gates when it does.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.
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