Undeniably, the overall outlook for the U.S. housing industry remains positive, with a healthy economy and strong job market helping the demand side of the equation. Conversely, the limited supply of homes for sale, rising rates and higher material prices have spurred concerns among investors regarding certain U.S. sectors, particularly construction.
The share price performance has not been an encouraging one for the homebuilding industry in the past three months. However, despite belonging to the same industry, M.D.C. Holdings, Inc.MDC has managed to navigate smoothly. The industry has witnessed a fall of 7.9% against the S&P 500's gain of 0.8%. Meanwhile, M.D.C. Holdings' shares have rallied 12.7% in the same time frame.
Hence, this homebuilder is one such company that continues to display strength in several areas. Adding the stock to your portfolio should not be a disappointment. Earnings estimates for M.D.C. Holdings have exhibited an uptrend, reflecting optimism in the stock's prospects. The Zacks Consensus Estimate for the company's 2018 and 2019 earnings has also moved up 12.3% and 11%, respectively, over the past 60 days. Let us delve deeper into the other factors that make this Zacks Rank #1 (Strong Buy) stock a profitable pick. You can see the complete list of today's Zacks #1 Rank stocks here .
What Makes M.D.C. Holdings a Solid Pick?
Lucrative Growth Prospects: Presently, the problem of adequate supply of land is taking its worst shape, as demand continues to scale up in the homebuilding industry. Given significant pent-up housing demand, M.D.C. Holdings has secured a decent backlog. At the end of the first quarter, potential housing revenues from backlog grew 18% year over year to $1.88 billion (as of Mar 31, 2018). Meanwhile, net new orders were up 15% year over year in values.
Meanwhile, the rising land and labor costs are threatening margins of major homebuilders. In this respect, the company has managed to control costs prudently, as is evident from its gross margin expansion. The company's home sales gross margin expanded by a whopping 230 basis points in the first quarter.
Overall, the company reported robust first-quarter results, with its bottom line increasing 70% year over year to 68 cents per share. The quarter benefited from solid top-line growth, a significant expansion of gross margin and much lower effective tax rate.
M.D.C. Holdings has solid growth prospects, as is evident from the Zacks Consensus Estimate for earnings of $3.37 per share for the current year, which is expected to grow 30.6% year over year. Meanwhile, the company's sales are expected to increase 14.9% in 2018.
Solid Industry Fundamentals: There's no denying that the steel and aluminum tariffs, announced by President Trump, along with rising interest rates are expected to create headwinds. In contrast, the overall outlook for the residential construction industry remains positive, with a healthy economy and strong job market continuing to drive stocks higher. The positive momentum is evident from the robust Zacks Industry Rank (Top 24% out of 256 industries) that instills optimism surrounding the housing stocks' earnings prospects.
Solid Dividend Yield: Given the robust fundamental backdrop, which is expected to be further strengthened over the course of this year, it is best to pick the ones that have high yields and pay dividends consistently.
In this regard, M.D.C. Holdings has a robust annualized dividend yield of 3.79%, considering the company's closing price of $31.77 on Jun 5. The company's dividend payments increased 30.7% year over year to $16.9 million at the end of first-quarter 2018.
Valuation Looks Rational: Because of homebuilders' asset-driven nature, it makes sense to value them based on price-to-book (P/B) ratio. The company currently has a trailing 12-month P/B ratio of 1.25. This is lower compared with the current P/B for the industry and S&P 500 that are pegged at 1.4 and 3.9, respectively. Its lower-than-market positioning indicates that there is room for an upside in the quarters ahead, substantiating its Value Score of A.
Other Stocks to Consider
Century Communities sports a Zacks Rank #1 and its earnings for the current year are likely to increase 47%.
Beazer Homes is a Zacks Rank #2 (Buy) stock and its earnings for the current quarter are expected to grow 78.3%.
Lennar carries a Zacks Rank #2 and its fiscal 2018 earnings are expected to grow 18.4%.
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