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MDC Holdings Inc. Message Board

  • oldschoolbuilder oldschoolbuilder Apr 19, 2006 10:17 PM Flag

    mdc's downside valuation

    A modest multiple on 2006 year-end book value of $53 should provide the absolute downside support. I think 1.1X 2006 YE BV is the real downside here which gets you to $58.30. While overshooting this level is always a possibility, I doubt the stock will stay below $60 for long. This is essentially MDC's liquidation value given very conservative assumptions.

    Let's take a quick look at the balance sheet. Assets primarily include cash, work-in-process inventory, and land under development. All of these items are being carried AT COST. There is no goodwill or other intangibles. Thus book value (assets minus debt) is a fairly clean number.

    Work-in-process inventory will be converted to cash within 1 year at a highly positive net margin (let's say 10%). All of MDC's land inventory is finished lots (which will also be converted to homes, and ultimately cash at a substantially positive margin within 2-3 years). Netting out debt gets you to a premium to book value of at least 10% which yields a MINIMUM stock value near $60 by year end. Looking out 12-18 months gets you to a MINIMUM $72-75 stock (a conservative estimate) based on the same analysis.

    MDC maintains a top 5 position in several very attractive (long term) markets. This is of great value (particularly to an external buyer) and should not be taken for granted just because things are slow at the present time.

    The environment is unquestionably tough NT and order and margin comparisons vs. 1H 2005 are also very difficult. But order growth WILL eventually turn positive (it may not happen until late-2006 or early-2007, but it WILL happen) as cancellation rates stabilize. Gross order rates were, after all, positive during 1Q. When net order growth turns positive (and the comps do become easier towards year-end), MDC stock should rally substantially.

    Bottom line--look for a near-term bottom in the high $50s and buy all you can for a 25%+ return over the following 12 months.

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    • School... you make a lot of valid points BUT,

      Its relative to where it has been in the the how ecomic cycle not an Absolute. If you told me all the fundaments on MDC andsaid that they were in the basic materials business or inductrial supply, or whatever industry , NOT homebuilding, I would say that the stock would be a buy.

      MDC(and all the HB's)has nothing but HEADWINDS. You will lose alot of money fighting to support this one.

      Can you not see that the smart money has be divestig itself of its positions...
      Remember there will always be index funds that will have to buy the HB's, But that index fund CANNOT be judged as non performance if all the stocks go down in the index.

    • 4000 orders....sounds great !!!

      I'd be more concerned with how many actually get closed. Completed deals.

      An "order" is nothing but a deposit.

      Did the buyer qualify for financing? Did the buyer cancel the "order" sometime between placing the deposit and closing? Closings are what matter....not "orders".

    • You can believe whatever you want. I am just relating what is happening around here. NOTHING is selling, builders are still building like mad, and prices are starting to come down.

    • Does your local market represent every major market in the U.S. where MDC does business (and do you think this is a PERMANENT condition)?

      If sales have "stopped" how is it that MDC can still book almost 4000 net orders this quarter? Someone seems to be buying these homes. Mgt. even mentioned an acceleration of traffic and orders in March. How is this possible if everything is imploding???

      What is not well understood by some investors on the board is that there have always been periods when certain markets have "frozen" to digest periods of price increases and spikes in existing home inventory. This is a normal part of the business. Professionally managed homebuilders have been through this many times before. If regional job growth stays relatively strong, these periods of pause have typically led to a resumption of normal sales activity. It may take a year or so--which tends to hurt sales in the near term, but it also leads to a shakeout of the weaker players in the business, and thus market share gains for the bigger guys.

      What some investors also forget is how much tougher the current environment is for the smaller private builders. Remember that the small builders are financed by local/regional banks, with variable rate loans that are now approaching a 10% rate (perhaps higher). These builders CANNOT afford to sit on unsold inventory. If things slow too much, these guys will have to liquidate the land or sell the homes at fire sale prices. This hurts the rest of the industry in the short run but it also puts many small builders out of business--and their share of the market goes to the big builders. Also, fewer and fewer banks are lending to the smaller builders (the banks tend to get very nervous when local real estate markets slow), which means the smaller builder can't secure any more land--and the big builders get share that way as well. Remember, the big builders are financed with long term fixed rate debt, have access to capital, and are fairly modestly leveraged. They also get the first look at the best pieces of land, the best subcontractor crews, and are able to secure much lower prices for materials. This is why local market slow downs have always led to accelerated share gains by the big boys.

      The bottom line is that MDC is in great shape financially to manage the current slowdown. Net debt/cap is only 30%, which means the company has plenty of flexibility to take advantage of market dislocations to buy cheap land or other builders who may be overextended at attractive prices. The company is extremely profitable (even assuming a lower level of profitability--say $9-10 in EPS per year for the next 2 years). With the stock at a modest premium to year-end book value, community growth up 20% Y/Y, and job growth still strong in their markets, it's not that big a stretch to say that the risk/reward for the stock over a 12-18 month time frame is VERY favorable at current levels.

      Just my 2 cents--feel free to disagree.

    • Sales have pretty much stopped in my part of the country as well. They haven't slowed down. They have virtually STOPPED. The builders are still going nuts and they are still clearing land for subdivisions in areas no one wants to live.

      Condos are really a mess. They make houses seem like they are selling like hotcakes.

    • Not sailing today but did just play 18 at the club on a beautiful day. You may disagree but one thing is a fact - this stock is hardly tanking on such supposedly terrible earnings.


    • I disagree with your opinion.

      Sail on chap

    • Oldschool,
      You make some great points and the stock is really not tanking today like so many posters on this board would have you believe. I think you are right, you will make a good return with this company in the long term.

    • Sounded like a snafu when April stats was mentioned on the conference call to the UBS analyst. She did not push the issue. I gasped that they would say anything. They backtracked on April when the second analyst pushed the issue. But they did talk about 2 Holidays. So I believe IMHOP, that it was a "slip".

      I am guessing that April is not "banner" at th best. Reserve further judgement.

      They did not sound 100% convincing that March net orders were returned to equal to prior year.

    • No orders?

      MDC had 4000 net new orders this past quarter.

      Gross orders were actually up during the quarter!

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