The highly anticipated recovery in the housing market helped MDC Holdings (MDC, Financial) post strong profitability in the recently reported quarter. Although the company saw weak margins due to higher incentives to spur sales activity in many areas, it looks well positioned for the long run. Let's see how.
MDC's smart strategies will drive growth
MDC is confident about its smooth growth in in future. It is evidencing some key indicators which might benefit its profitability in future. It is optimistic about good growth as it is seeing good volatility in the industry and is expecting it to drive more healthy demands in the future. The rebound in housing market is commendable and it is expected to remain profitable for long. This will give many housing companies such as MDC Holdings better opportunities.
But the journey doesn’t seem smooth for MDC as it is expected to face many challenges. Though the market is improving yet it can suffer due to lower federal housing authority loans that will reduce the mortgage availability to some important group of potential buyers. While the underwriting standards for mortgage have already many credit worthy buyers by reducing the mortgage availability. Further it has also increased the overall required time to obtain loan approval. However, the government in working on this issue and once it comes up with a good solution, MDC Holdings is expecting some relief from some of these impediments which are the major hurdles in the flow as of now.
Moreover, MDC is also engaged in expansion of its active community count. This has already benefited the company in the past by exhibiting a good 17% increase in the home orders on a year over year basis. With these improvements, MDC is having great opportunity to expand its revenue and earnings to an impressive level in the future despite the hurdles it is facing now. In addition, to attract the investors MDC is also focusing on maintaining an impressive balance sheet with impressive liquidity levels. The company is expecting this initiative to turn out to be the most significant step in its growth story. The company also has some significant disposal to pursue new home buildings assets that can further help its growth going forward.
Conclusion
Now moving on to the valuation, with a trailing P/E of 16.55 the stock looks reasonable and the forward P/E of 13.55 shows good earnings growth in the near term. But in the long term the company is looking disappointing. Its earnings are growing at a CAGR of -7.25% which is lower than the industry average of 17.86%. The company is no doubt growing, but there are some grave factors such as pressurized gross margins which are leading it to lose the market share. From the investment perspective, MDC is a good pick as of now.
