MI Homes Builds Momentum As Housing Market Improves

The U.S. homebuilding industry got more good news late last month amid reports that new single-family home sales in November reached their fastest pace in two-and-a-half years.

According to data from the Commerce Department, November sales rose 4.4% from the prior month and 15% from the prior year to a seasonally adjusted annual rate of 377,000 units.

It was the highest rate of new-home sales since April 2010, when the industry benefited from a temporary $8,000 tax credit for homebuyers.

The news continued a months-long rebound in the industry that has been driven by record low mortgage rates as well as a decline in unemployment and foreclosures.

Stock Rally

Publicly traded homebuilders have rallied as well. The 18 stocks in IBD's residential building group are up more than 20% since the entire sector slumped on July 19.

Some stocks, includingMI Homes ( MHO ), have risen at an even faster rate. MI shares have gained 62% since July 19 thanks to a sharp turnaround in its financial fortunes.

MI Homes is the nation's 16th-largest homebuilder with 128 active communities in the Midwest, mid-Atlantic and South, as of Sept. 30.

The company builds homes for a wide range of customers in 13 metro areas, including Chicago, Houston, Indianapolis, Cincinnati, Tampa, Fla., and Charlotte, N.C. It primarily caters to first-time and move-up buyers.

"Their footprint is a little different than a lot of other large homebuilders," said Joel Locker, an analyst at FBN Research. "They don't build out West in the go-go markets like Phoenix, Las Vegas and California. The Midwest is not as sexy as the Western markets, but the affordability there is truly affordable. It's more of a steady market."

MI's markets finally began to stabilize in 2012, helping the company rebound from a severe financial pounding that began in 2007 and continued through 2011. The company absorbed huge losses each of those years and watched its stock price plunge below 5 in March 2009.

MI moved back into profitability during the second quarter of 2012. It also turned a profit during the third quarter.

The company's return to profitability lagged builders such asLennar ( LEN ) andD.R. Horton ( DHI ), both of which finished 2010 in the black. But MI's performance compares favorably to builders such asBeazer Homes ( BZH ) andKB Home ( KBH ), each of which continued to lose money in 2012.

Meanwhile, MI has run off five straight quarters of accelerated revenue growth. The top line has grown in double digits each of the last three quarters.

The company posted third-quarter revenue of $209 million, up 47% from the prior year. Earnings were 42 cents a share vs. a loss of 25 cents a year earlier.

MI reported 757 new contracts to build homes during the quarter, a gain of 29% from the prior year. Homes delivered were 746 compared to 582 the previous year.

The company's backlog of homes had a sales value of $334 million and an average sale price of $284,000 as of Sept. 30. That compares to a backlog sales value of $223 million and an average sale price of $266,000 a year earlier.

"Our third-quarter results represent our best quarterly performance in five years and position us to return to full-year profitability," Chief Executive Robert Schottenstein said in a statement. "We are making meaningful progress on a number of important fronts as housing conditions throughout most of our markets have improved."

The improved financial performance played a big part in Standard & Poor's late November decision to raise its outlook on MI to positive from stable.

"The outlook revision reflects MI Homes' faster-than-expected return to profitability, driven by improved margins on new communities and a faster sales pace in all markets from a relatively firmer overall housing environment," Standard & Poor's said in a report.

The report also said MI's "strategy to expand community count in its better-performing markets will result in stronger credit metrics through greater operating leverage."

At the same time, Standard & Poor's affirmed its "B-" corporate credit rating as well as its existing debt ratings on MI.

Risk Profile

Those ratings reflect MI's "aggressive financial risk profile, marked by improving but still weak EBITDA-based credit metrics. We characterize MI Homes' business risk profile as 'vulnerable,' given (its) comparatively smaller platform and current concentration in certain weaker Midwest housing markets."

FBN's Locker is among those who believe homebuilders still have more problems to deal with, despite the sector's recent rebound.

"It's almost like a perfect world for builders in terms of low mortgage rates, but there's still a lot of shadow inventory out there," Locker said. "In addition, housing in general is the most subsidized sector in the world. Once you subsidize it so much, you put a price ceiling on it. There are still a lot of question marks surrounding the sector."

In the near term, however, the outlook looks pretty strong for MI. Analysts polled by Thomson Reuters expect the company to report full-year 2012 earnings of 61 cents a share. They see profit rising to $1.45 a share in 2013.

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

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

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