M.D.C. HoldingsMDCThe company has two main operations: Homebuilding and Financial Services. The company’s Homebuilding division purchases ready-to build lots or develops lots to the required extent for the construction and sale single-family detached houses.
Under the brand “Richmond American Homes”, the company aims at selling its homes to first-time homebuyers. The company’s Financial Services segment originates mortgages primarily for its homebuyers. It also offers insurance coverage. I am bullish about the stock.
Industries
Between 2020 and 2021, the COVID-19 pandemic had a significant impact on the U.S. economic. It shook consumer demand, financial markets, and job levels. The homebuilding industry needs a stable trading environment and a positive macroeconomic outlook to be successful. But, it was surprising that the pandemic saw a surge in demand for homes.
This was due to the growing demand for home renovations and new homes. M.D.C. home builders have enjoyed a great trading environment in the last few years, thanks to the low mortgage rates that home buyers were still able to take advantage of.
However, investors are concerned about the industry’s outlook. This has caused all related stocks, including M.D.C. to plummet.
Investors have become more nervous about the future prospects for companies in this space like M.D.C., as they worry about an uncontrolled inflationary climate that could negatively impact consumers’ purchasing powers and a macro environment that could affect food and energy prices that could cause the economy contraction.
Buyers are also being faced with higher financing costs after years of historically low mortgage rates. The average 30-year fixed-rate mortgage rate has increased by approximately 200 basis points annually, despite the fact that the average rate is now around 3%.
The current mortgage rates are still attractive from a historical perspective. It is reasonable to expect that the move higher will have an immediate impact on M.D.C. as buyers adjust to this new reality.
M.D.C. has remained strong despite the pandemic’s boost. Not only are its results continuing to flourish but so do its future home sales projections.
Strong Momentum Retention
M.D.C.’s Q1-2022 results highlighted the company’s strong momentum following the pandemic. Home sale revenues grew 19% year over year to $1.24Billion. The 3% increase in unit closings and the 16% rise of average selling prices drove the revenue growth.
Net income grew by 34% to $148.4million, or $2.02 per share. This is an increase of 34% over the $110.6 million or $2.51 per share in the same period last year. The increase in home prices, which outpaced the rise in labor costs, boosted net income by a 380 basis points gross-margin growth to 25.7%.
M.D.C. continues experiencing high demand for its homes, despite the concerns surrounding the homebuilding industry. This can be seen in the 2% increase in unit orders year-over-year, which was $1.84 billion in Q1. This was impressive despite the unprecedented demand last year.
The company believes that despite the underlying concerns and strong demand, pricing power will be driven by strong local economies in many of its markets, historically low inventories, and encouraging demographics. A permanent lack of available home supply is equally important, which keeps the market for home construction thriving.
Accordingly, the company projects that it will achieve between 10,500 to 11,000 home delivery during the year. This includes 2,400 to 2,600 deliveries within the next quarter. The average selling price for Q2-2022’s unit delivery is expected to range between $560,000 and $570,000. This implies an increase in unit deliveries from Q1-2022, which had an average selling price $556,000.
The Valuation
Based on M.D.C.’s most recent results and current management outlook, I expect the stock to deliver EPS close at $10.00. This is significantly lower than the consensus estimate of $10.77, just for prudential reasons. At the current stock price, M.D.C’s forward P/E is close to 3.7.
Investors could see extraordinary returns from a valuation expansion push if the market’s worries prove to be unfounded. M.D.C. is still very affordable, even if earnings decline significantly in the next years.
Wall Street’s Take
M.D.C. Holdings, which is focused on Wall Street, has a Moderate Buy consensus Rating based upon one Buy and one Hold rating that were assigned in the last three months. The average price is $55.25, which is $55.25.M.D.C. Holdings price targetThis implies a 51% upside potential
Takeaway
M.D.C.’s investment case has something I like. Investors don’t have any need to place their future returns prospects on the stock returning to a “fair” price. Investors should be rewarded by the stock’s current dividend yield, 5.2%, regardless of its movement in the short-to medium term.
Investors are likely to enjoy another dividend increase this fall after six consecutive years of annual dividend increases. The most recent dividend increase was 25% to $0.50 quarterly payout.
Given the low payout ratio, a strong increase could be a catalyst to help the stock rally higher, especially since the dividend yield is already very high.
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These views and opinions are solely the author’s and do not necessarily reflect the views of Nasdaq, Inc.
