MDC Holdings (MDC, Financial) recently disclosed its financial results. Its results missed the analyst estimates on both the top as well as bottom lines for the quarter. The homebuilder posted revenue of $418.4 million, while its earnings came at $0.38 per share. The analyst had been modelling earnings of $0.50 per share on the revenue of $501.2 million for the quarter.
A strong operational performance
However, the homebuilder has witnessed 27% growth in its active community count, 13% higher average selling price and 17% growth in its net new home orders with strong backlog that sets the stage for growth going forward. The company is expected to perform better in next fiscal year on the back of strong rebound in the housing market. It considers the recovery in the housing market to continue its tailwind and improves its earnings in the future. The analyst expects its earnings to register 31% earnings growth to $1.92 per share in fiscal 2015.
In addition, the company is aggressively investing in land. It has strategically spent approximately $169 million on land acquisition and development. It has invested about $460 million on land and development initiatives so far this year. Moreover, its acquisition on lots looks pretty strong. It has acquired about 1,300 lots. This leads to a total of 3,700 lots acquisition so far this year for the company. The company now owns approximately 16,300 lots. This indicates a 3.7 year supply of lots on trailing twelve month delivery basis.
These strategic investments in lots, land and development should assist the company to gain the benefits of higher average home prices that has improved across the United States. The west has experienced about 11% increases in average home prices, while its mountain segment and California had average price benefit of approximately 10% and 23% respectively. It saw price improvement in other regions as well.
Regions to drive growth
MDC expect its California, West and Arizona divisions to drive its results in the ongoing quarter. It is seeing higher percentage of deliveries from Orange and Los Angeles counties with better price realization. Also, it is seeing solid community count growth in Florida, Nevada and Colorado. Also, it expects its soon to be active communities to surpass its soon to be inactive communities. It is up about 11 net basis points. This is certainly a good news for the company as it creates positive bias for its community count.
Moreover, MDC has built strong liquidity. It has approximately $1.00 billion in liquidity excluding the recent redemption of $250 million of its senior notes due July 2015. This resilient liquidity position includes $538 million in cash and marketable securities, and approximately $425 million in availability under its revolving credit facility. This strong liquidity should help the company purchase land in areas where its community count is enjoying high growth such as West, California, Florida, Nevada, Colorado and Arizona.
MDC has been using its strong liquidity to purchase land in some of the more desirable areas they operate in, including Utah, Arizona, Florida and, most importantly, California. They invested heavily in California over the past year, growing their total number of lots there by 84% and are now reaping the benefits with substantially higher prices, with a 35% increase in average selling price since last June.
Apart from these, the recent drop in its share price reveals good opportunity for shareholders to buy more of the shares as the stock offers good short term returns. The stock has declined roughly 19% this year so far. Moreover, MDC is one of the few home builders that pays highest dividend with dividend yield of 3.84% annually in the housing industries that should attract more shareholders who are looking for high dividend yielding stocks.
Final take and valuation
MDC Corporation looks a great pick amidst improving housing market conditions. MDC continues to invest in land and development in high growth markets that should accelerate its bottom line performance going forward. Moreover, the stock shares cheap valuations. It is currently trading at the trailing P/E of 16.55 and forward P/E of 13.55. It has profit and operating profit margins of 4.77% and 6.09%, while its ROE yield stands at 6.59% for trailing twelve months. Its balance sheet carries total cash of $493.95 million and total debt of $1.14 billion.
