Homebuilder MDC Holdings Rises In West, Florida Next


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Richmond American Homes' parentMDC Holdings ( MDC ) is building itself back to health as the housing market improves.

But it still has a ways to go to reach its peak in the pre-crash glory years.

The high mark was in 2005. That year, the company's stock hit 89.63 while revenue was closing in on the $5 billion mark. Earnings soared to more than $11 a share.

This year, analysts expect earnings to reach $2.23, up 74% from last year, and for revenue to hit $1.7 billion, a 41% gain over last year.

Shares were recently trading down, as were a lot of homebuilders on the heels of a string of mortgage-rate increases that may have caused loan applications to fall.

But the Mortgage Bankers Association said Wednesday mortgage applications rose for the first time in four weeks even as the 30-year fixed rate edged up to 4.15%.

After losing money for two years and seeing sales plummet even longer, the Denver-based homebuilder has posted five straight quarters of profits.

The first quarter was off to a smashing start: Earnings soared from 4 to 45 cents a share on revenue of $332 million, which was up 77% from last year.

CEO Larry Mizel gushed in early May's quarterly report that the absorption rate of new home orders per active community was "our highest level since 2006."

Excited Buyers

He told analysts that buyers are "excited and interested and they want to buy a home, like, right now."

MDC is heavily concentrated in Western markets, where prices have climbed the sharpest in the country.

The company's average selling price for homes closed in the quarter was $325,000, up 9% from a year earlier.

Average selling prices in Colorado and California were above the company average. Closings in the two states more than doubled.

Arizona, Nevada and Washington state logged even stronger double-digit price gains.

But will buyers want to keep buying if prices and interest rates keep climbing?

Builders in markets that have appreciated the most may have to adjust product and pricing to keep buyers coming, says Alex Barron, senior research analyst with the Housing Research Center.

If rates go higher, buyers might look to smaller homes or settle for fewer upgrades, he says. That could impact builders' profit margins.

"If your interest rate goes up from 3.5% to 4% that means your purchasing power goes down by about 6% or 7%," Barron said.

On the other hand, he says, demand for homes is high and should stay that way as long as interest rates stay relatively low. He sees demand rising at least through 2016, when he expects supply (now low) and demand to reach equilibrium.

"We should be building 800,000 single-family new homes a year and right now it's a little over 400,000," Barron said.

"If interest rates go up, people still need a place to live. They'll just have to pay less," he said, drawing the analogy of buying a hamburger instead of a steak.

MDC's typical mix has been evenly divided between first-time and move-up buyers, but lately that's shifted to more move-up buyers. The mix is now 60%-40% in favor of move-up buyers, Chief Financial Officer John Stephens said in the recent conference call.

MDC delivered 1,018 homes in the quarter, up 64% from the year before.

Net new orders totaled 1,300 homes, a 22% gain.

The backlog stood at 1,927 homes, up 30% and valued 45% higher than last year.

Higher prices and deliveries helped lift MDC's gross margin to 17.4% from 14.1% a year earlier. Management predicted higher gross margins for the rest of 2013.

Their margin guidance was "significant since the company rarely offers forward looking statements," Deutsche Bank analysts pointed out in a recent report.

In a review of building earnings in that May 31 report, the analysts wrote that MDC's margins should rise as a result of "more deliveries from land development, increased spec sales and generally better pricing conditions."

The number of MDC's active subdivisions was down 6% from the end of December to 139 as higher-than-expected sales resulted in various communities selling out sooner than expected. Also, some of the newest ones weren't yet considered active.

But CEO Mizel stated that many of the new subdivisions added over the past few quarters have recently opened, which will result in a higher active count in the second quarter.

MDC recently expanded its Richmond American Homes operations into South Florida, where it plans to open a community of two-story homes in Boca Raton in the fourth quarter. It already has growing operations in Jacksonville and Orlando.

Vacant Lots

Lots owned and under option in the first quarter rose 11% from December to more than 12,700 lots.

MDC has enough land supply to last a little more than three years, among the lowest of publicly traded builders, pointed out KeyBanc Capital Markets in a recent report.

Lennar ( LEN ) has 7.9 years of owned lot supply;D.R. Horton ( DHI ) has 6.4 years, the report noted.

In a rising land market, "If you have short supply you are going to be forced to pay up for land," Barron said. "But short supply could be a good thing when the market starts to slow down and you want to have more flexibility."

He says MDC's challenge is to "keep an adequate supply of land."

MDC's conservative management team "has managed to do pretty well through ups and downs of the market," Barron said.

"They don't have too much debt and they're not overly leveraged," he said. "They have a lot of cash sitting on their balance sheet. If they find interesting opportunities, they can pounce."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
Referenced Stocks: DHI , LEN , MDC

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