MDC Holdings (MDC, Financial) disappointed the Street with its third quarter numbers that came below the street expectations. But it is not the only one suffering, as many of its peers share similar fate with falling numbers. In fact, if we consider its stock movement the shares have been on a declining spree since the beginning of 2013, which continues till date. And now with various macroeconomic headwinds on the way, the big question reeling in investors mind is what to expect from MDC in the days ahead.
A closer look
During the quarter, it experienced some downward pressure on its margins; but considering the 300 basis point improvement since the low of 2011, its long-term prospects seems to be good. Not only this, but the backlog margin improvement is also a strong indication that the fundamentals are improving. To further support this growth, the government is taking all measures. The mortgage rates have declined considerably and are expected to go down further.
According to an article in Investors' Business Daily, “After ending 2014 at 3.87%, the average interest rate for a 30-year fixed-rate mortgage fell to 3.73% in the week that ended Thursday, Jan. 8, right when applications were surging. And in the week ended Thursday, Jan. 15, rates fell even further — to 3.66%.” If we check past records, such rates were last seen in 2013 with an average of 3.59%, which is a significant decline from 5% in 2011. Moreover, the expansion of its active community count has already produced positive results, driving a 17% year-over-year increase in its net new home orders.
In addition, MDC has sufficient liquidity in its business with more than $600 million of debt offering along with a $450 million line of credit. Talking about these numbers the management cites that these transactions are one of its kind in the industry and will prove to be significant value in the future. With such money inflow, the company has sufficient cash reserves to carry out its projects. Also the hike in its average selling prices would boost both its top and bottom line.
Conclusion
These are interesting facts that will play key roles in shaping its business in the days ahead. Currently it has a trailing P/E of 15.66, compared to the industry P/E of 16.04. But its forward P/E seems more impressive at 12.82, which reflects the growth in its earnings. Led by its tepid performance, the stock is currently near its 52-week low, but from a long-term perspective we could see more upside to this stock.
