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M/I Homes Makes Big Revenue Gains in Q4, but Earnings Didn't Deliver

By Tyler Crowe - Feb 7, 2018 at 2:05PM

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Despite impressive revenue growth, the company's profits were held back by more than just one-time tax costs.

2017 was a good year to be a homebuilder as just about every company in the industry benefited from the same positive trends such as the millennial generation looking to buy their first home, low unemployment, and a relatively low-interest rate environment. M/I Homes (MHO 7.51%) benefited from these trends well in the fourth quarter to grow its sales by double digits, but there is one component of the company's results that is slightly concerning.

Let's take a look at the company's most recent quarterly earnings and see what M/I Homes has in store for the rest of 2018.

Row of houses in a development

Image source: Getty Images.

By the numbers

Metric Q4 2017 Q3 2017 Q4 2016
Revenue $609.9 million $476 million $511.8 million
Operating income $38.8 million $39.3 million $37.9 million
Net income $15.9 million $18.8 million $19.3 million
Diluted EPS $0.53 $0.64 $0.67

Source: M/I Homes earnings release. EPS= earnings per share.

M/I Homes' fourth quarter had its good elements, but it wasn't necessarily a slam dunk quarter. Revenue rose 19% year over year, which is impressive compared to the results some of its peers have posted thus far. However, those revenue gains came at a steep cost as selling, general, and administrative costs grew 15% and were 12.6% of homebuilding revenue; a rather high rate. That and higher homebuilding costs associated with rising wages and a tighter labor market led to such a modest gain in operating income for the quarter.

It should be noted, though, that there were some one-time charges in that result that impacted the bottom line, most notably a $0.21 per share charge related to the changes in the U.S. tax code. So the net result for the quarter was better than what the reported numbers say. 

Regarding sales, the gains this quarter came from its Midwest and Southern divisions, while new homes delivered in its Mid-Atlantic region slipped slightly. Based on its backlog and land positions, it looks like this trend will likely continue throughout 2018. That may not necessarily be a bad thing, though, since M/I is a smaller player in this industry and would likely benefit from gaining scale in a particular region rather than modest gains across the board.

MHO homes delivered by region for Q4 2016, Q3 2017, and Q4 2017. Shows gains in midwest and southern offseting a slight decline in the mid-Atlantic.

Source: M/I Homes earnings release. Chart by author.

Headed into 2018, M/I Homes has a backlog of $791 million with an average selling price of $393,000. It has also increased its total lots owned and under contract by 23% to 28,500. 

What management had to say

In the company's press release, CEO Robert Schottenstein was rather upbeat about the company's most recent performance and highlighted some of its major milestones this past year.

For the first time in our history, we exceeded 5,000 units in both homes delivered and new contracts while reaching nearly $2 billion in revenue. Importantly, our revenue and earnings growth resulted from strong performances in many of our homebuilding divisions, combined with another record performance by our financial services business. We also reached our highest year-end backlog level in more than 10 years, with a sales value of $791 million -- a 15% increase over

We are excited about our business as we move into 2018. We ended the year with $152 million of cash, no outstanding borrowings under our $475 million unsecured credit facility, shareholders' equity of $747 million and homebuilding debt to capital ratio of 46%. We are well positioned for continued growth in 2018 with our strong year-end backlog and a significant number of planned new community openings.

MHO Chart

MHO data by YCharts

What a Fool believes

2017 was a good year for M/I Homes overall, on top of achieving some of those sales and backlog milestones, the company also cleaned up some of its corporate structure by removing its preferred share class and bought some of its convertible debt. The elimination of its preferred dividends will free up some cash to keep buying new land lots or perhaps buy back some stock to offset dilution from stock-based compensation. 

The one concern for M/I from here on out is cost control, its gross margin is already slipping because of higher homebuilding costs, and its SG&A costs are on the high end of the industry. That may not sound like too much of an issue when housing is booming, but it makes it harder to adjust to any potential lull in the market down the road.

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