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MDC Holdings' Sales Come Roaring Back After an Oddly Weak Quarter

By Tyler Crowe - Aug 8, 2018 at 11:20AM

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I guess those sliding sales weren't a sign of a slowing housing market after all.

In the first quarter of this past year, something seemed a bit off in MDC Holdings' (MDC -3.61%) earnings report. Even though the first quarter is traditionally slow for home sales in general, MDC's new home sales slid for two straight quarters, and revenue was up on selling prices alone.

In this most recent quarter, though, the company got back on track with a much-improved earnings result. Let's look at what happened this past quarter and whether the improvements in the business make it a more attractive investment. 

Newly constructed home

Image source: MDC Holdings.

MDC Holdings: By the numbers

Metric Q2 2018 Q1 2018 Q2 2017
Revenue $749.6 million $607.6 million $649.0 million
Pre-tax income $76.6 million $50.5 million $51.8 million
Net income $63.9 million $38.8 million $35.8 million
Diluted EPS $1.12 $0.69 $0.60

Data source: MDC Holdings earnings release. EPS = earnings per share.

MDC's second quarter was everything you would want from a homebuilder. Revenue was up on both higher home sales and average selling prices. Gross and net income margins expanded, and net new orders were up compared to the prior year and outpaced new home deliveries. And management has significantly increased its leased or owned lots as well as its inventories of completed homes and homes under construction. If we wanted to nitpick these results, the company's gross and net margins of 19.1% and 8.5%, respectively, are still a little on the low side compared to some of its larger homebuilding peers. 

One interesting wrinkle in MDC's results is that it looks like it is actively moving away from markets in its East region. Both deliveries and net new orders are down year over year in this region, and the dollar-value backlog has declined 29% over the past year. Management did, however, increase its holdings of lots in the East by 45% as part of a massive land acquisition strategy this year. So it's entirely possible that it is just getting ready to introduce a whole new set of housing communities in the coming quarters.

MDC new home deliveries by region for Q2 2017, Q1 2018, and Q2 2018. Shows increases for West and Mountain but flat results for east.

Data source: MDC Holdings earnings release. Chart by author.

That land acquisition strategy is truly an important component of MDC's future results, and it says a lot about demand for new homes. MDC prides itself on keeping a much lower land supply than its peers and keeping a more asset-light business in what is, by its nature, an asset- and capital-heavy industry. A lower land supply and a focus on pre-sales and a high percentage of finished lots help the company weather slower times or market downturns. So the fact that MDC is willing to plow so much money into new lots shows that there is still room for housing to grow despite early signs of a slowdown. 

What management had to say

Here's CEO Larry Mitzel on the company's much improved second-quarter earnings and management's rationale for expanding its land and lot positions: 

The strategic initiatives our Company has implemented over the last several quarters coupled with our strong execution in the quarter culminated in a 48% year-over-year increase in pre-tax income. We continued to see healthy demand in our markets, especially at affordable price points, which allowed us to raise prices in a majority of our communities during the quarter. We believe we are well positioned as we head into the second half of the year, given the strong fundamentals we see in our markets and our positioning within those markets.

The second quarter also represented the seventh consecutive quarter in which we approved more lots for purchase than we did in the year-ago period. Consistent with the first quarter of 2018, almost 50% of those lot approvals are targeted to be a part of our Seasons Collection or other more-affordable product lines. At the end of the quarter, we had more than 23,500 lots under control, representing a 38% increase over the second quarter of 2017. Our recent land acquisition efforts give us a great runway for growth and position us to benefit from the rapidly improving market for affordable homes.

MDC Chart

MDC data by YCharts.

Just a speed bump

Based on these most recent quarterly results, it appears that the slowdown in sales over the past two quarters was likely just a bump in the road. MDC's second quarter delivered on every metric an investor would want. Also, management looks to be gearing up to cater more to the largest buyer demographic these days -- millennial first-time buyers -- with more homes at entry-level prices. Considering how much land MDC has added in recent quarters, it seems that management thinks there are plenty of buyers out there.

MDC as an investment isn't without its flaws. Its margins are lower than most of its peers, and its debt leverage is a little on the high side. However, it is one of the few homebuilders out there that pays a high dividend right now (it currently yields 3.9%), and its P/E ratio of 9.3 times is one of the lowest in the industry. If the housing market has the legs that MDC's recent land purchases suggest, then its stock might be a good value pick.  

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