Despite the fact that M/I Homes (NYSE:MHO) continues to deliver high rates of sales growth and signing up new customers for homes, earnings growth at the homebuilder hasn't been keeping pace. In fact, were it not for lower corporate tax rates this year, the company would have delivered a lower net income result than this time last year.
However, sales growth is going through the roof, the housing market is looking pretty strong, and M/I Home shares aren't that expensive right now. Is this perhaps a turnaround stock worth considering? Let's take a look at the company's most recent earnings numbers and see what kind of value could be had in this stock.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$437.8 million||$609.9 million||$406.9 million|
|Operating income||$31.1 million||$38.8 million||$31.6 million|
|Net income||$18.0 million||$15.9 million||$15.6 million|
There are a lot of mixed signals in this most recent earnings report. The company noted a significant decline in sales compared to the prior quarter, but that isn't necessarily a bad thing since home sales are seasonal and M/I Homes wasn't the only one to post lower sales in the first quarter.
The good news here is that there appear to be a lot of sales coming in the near future, as the company reported a 20% increase in new contracts, which was a quarterly record. It's also encouraging to see that the company's cancellation rate continues to decline -- 12% for the past quarter -- which means more of those new contracts are going to translate into revenue down the road. At the end of the quarter, M/I Homes' backlog broke the $1 billion mark for the first time.
The more frustrating thing about these results is that the company's margins are deteriorating. Selling, general, and administrative costs were 13.2% of revenue, among the high end for homebuilders, and pre-tax operating margin was a paltry 5.5%. Management says that part of that was due to some small accounting adjustments and some acquisition costs, but it still puts the company's income margins well below its peers'. Perhaps it has to do with the higher costs for new contracts that have yet to translate to booked revenue, but we'll have to wait and see if that is the case.
What management had to say
Here's CEO Robert Schottenstein's press release statement on what he expects for the rest of the year:
We are off to a very solid start in 2018. On March 1, we successfully closed on the acquisition of Detroit-based Pinnacle Homes, strengthening and expanding our geographic footprint. Our financial condition remains strong. We ended the quarter with shareholders' equity of $786 million and a homebuilding debt to capital ratio of 48%. Looking ahead, with our record first quarter backlog, planned new community openings and steady housing market conditions, we are poised to have a solid 2018. We will continue to focus on increasing profitability, growing our market share, and investing in attractive land opportunities.
The best investment case
It's pretty clear that M/I Homes has better days ahead of it thanks to all these new contracts and a robust housing market. That doesn't necessarily mean that M/I Homes is a great investment in this industry, though. The company's margins and rates of return are well below most of its peers that are benefiting from the same macroeconomic tailwinds. It's also going to be challenging for M/I Homes to catch up since it doesn't have the economies of scale that some of the bigger players do.
M/I Homes has a few things going for it. It has a strong backlog, land options in some attractive housing markets, and isn't overburdened by debt, which could make it an acquisition target in an industry that is ripe for consolidation. As a stand-alone company, though, it has low margins and underwhelming rates of return. The best-case scenario for M/I Homes is a buyout, but that rarely makes for a good long-term investment thesis.