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MDC Holdings Inc. Message Board

  • oldschoolbuilder oldschoolbuilder Apr 23, 2006 11:29 AM Flag

    Long Case/Short Case

    Let's take some perspective.

    MDC (the stock) is currently trading at 1.12X YE Book Value. I've illustrated in my past posts that this represents a valuation that is BELOW liquidation and WAY BELOW franchise value. YE 2007 book value should be in the low-mid $60s at worst, so the shares are currently below that. Management owns a lot of stock (roughly 25% of outstanding shares), and Mizel and Mandarich are both in their 60s. At near book value, other builders should be very interested in this franchise as the acquisition of MDC (say at even a 30% premium to the current price) could be done without incurring meaningful goodwill, be VERY ACCRETIVE, and would bring a top 5 position in several VERY attractive markets (DC, Arizona, Las Vegas, California, Florida, Colorado, Utah), something that cannot easily be achieved on an organic basis.

    Net debt to cap at year end will be only 30% (possibly less if MDC decides not to grow its land bank or increase its % of land controlled under option from the current 42%). Thus, MDC is very underleveraged and has some dry powder to improve earnings by deploying debt capital to either 1) accelerate growth via acquisition of land or a competitor's assets at a good price or 2) buy back a meaningful amount of stock. It seems like the first option is what management WANTS to pursue but option #2 can't be ruled out if the stock goes down much more.

    Community count is up 20% from last year while absorption is down 30-35%, yielding a decline in net new orders of roughly 15%. However, GROSS orders are actually up, which means cancellations are the real culprit of a decline in orders. Once cancellations return to something closer to normal (and they should as speculators drop out of the backlog over the next 3-6 months), net orders should be closer to flat (and that assumes absorption stays very negative on EASIER comps as we head into 2007). Job growth is still, after all, very positive in MDC's markets and this bodes well for continued demand for new homes after the inventory correction runs its course.

    The short case--housing is "imploding". Well flattish/positive GROSS orders at MDC (and other builders) presents evidence to the contrary. Inventory corrections are not the same as implosions. Margins and profitability may be lower in 2007 but that is also not the same as an "implosion". Does anyone here believe that MDC will not be extraordinarily profitable (on an absolute $ basis) in 2007 or 2008??? Because the only way to justify the current stock price is to assume a DECLINE in book value or LOSSES in the near future. The publicly traded housing sector is cyclical, but it is nowhere as cyclical as it was 15 years ago. Yet MDC's current valuation assumes something much worse.

    Yes, momentum is negative as the housing market cools, which means margins will be lower. But the ABSOLUTE level of profits is still very high. And the valuation relative to those profits and net asset value is simply absurd.

    This is not like shorting the tech bubble. The momentum is going in the same direction but the valuations of the builders are ALREADY too low. Once momentum stops being negative (and there is a case to be made that this may occur in the next 12 months), the upside for MDC and other builders is substantial.

    Longs may need to take a longer term perspective than the next 3-6 months. But there is some decent money to be made for the patient. Shorts can ride the slowdown in housing but should be aware that they are playing a game of chicken given current valuations and the fact that there are LOTS of other shorts in the stock.

    I don't know if there are any other serious investors out there but their opinions are certainly welcome.

    Oldschool

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    • Well, I saw the long case.
      Now, where is the short case?????

    • Very good summation of the situation.

      I would just like to add that the assets comprising the book value are mostly real estate assets. Unlike plant and equipment that may not be salable, real estate is almost always salable. Though some of the assets may have lost value, many of them were probably purchased before the great increase in prices. Since assets are normally listed at purchase price, they could be worth more than the balance sheet indicates.

    • Oldschool....

      You just don't seem to get it.

      The housing slowdown is gaining speed each week.....Inventory is ramping with unbelievable speed...and all the while interest rates are inching higher...there are no buyers in major markets that were leading the "boom" (Florida for one)...

      Yet you talk about the "franchise value"...that's a joke when nobody wants to buy a home. You look at the "book value" as if it were a number set in stone....grasp the concept here...with fixed overhead...debt...and a lack of sales....how can anyone extrapolate an even higher book value? Thats simply ludicrous.

      Read the Palm Beach Post today...auction at Tesoro, lots that were $500K AND UP...HIGH BID WAS $165...THEY COULDN'T EVEN GET AN OPENING BID ON A 1.5 MILLION DOLLAR HOME...
      Tesoro is an absolutely beautiful community...well located....AND THEY CAN'T GIVE IT AWAY.

      And all you see is all this "value"....

      Deal with some reality.

      • 1 Reply to tdl4138
      • <<The housing slowdown is gaining speed each week.....Inventory is ramping with unbelievable speed...and all the while interest rates are inching higher...there are no buyers in major markets that were leading the "boom" (Florida for one)...>>

        Yep, no doubt about it we have an inventory problem for a while. Buyers are definitely on the sidelines waiting to see how things shake out. Speculators are selling in droves. This should be a hit to margins for the builders near term. Will this last forever? At some point there will be a time when true demand (driven by job growth) meets true supply (ex-speculator inventory).


        <<Yet you talk about the "franchise value"...that's a joke when nobody wants to buy a home.>>

        Yes, Sir, nobody will ever want to buy a new home again. I guess people will either rent, or maybe even live in cardboard boxes as land is forever worthless. MDC's top 5 position in great long term markets isn't worth much either. As General Lyons if he agrees.



        <<You look at the "book value" as if it were a number set in stone>>

        It is nearly set in stone if it is pretty close to cash value--as a big portion of MDC's assets are being converted to cash in 12-18 months.



        <<....grasp the concept here...with fixed overhead>>

        Fixed for a short time period, variable in the long run (land sellers, suppliers, labor costs will adjust downward too)


        <<...debt>>

        MDC is pretty conservatively capitalized; small builders may be toast


        <<...and a lack of sales>>

        1.8 million new homes expected to be sold this year is not a "lack of sales"


        <<....how can anyone extrapolate an even higher book value?>>

        Gee, current book value + future profits - dividends = Higher book value

        That is unless you expect losses not earnings. If so, we have a fundamental disagreement.

    • You can't fight the Fed! 'nought said?

      This is the largest housing bubble in recorded history...and it is 100% Fed caused. Now they are taking away the punch bowl. You cannot compare this to past boom/bust housing cycles...this is uncharted territory. Greenspan's rate cuts were desperate and excessive. Greedy, reckless lenders threw gas on the fire, with no-qual, no-doc, nothing-down, I/O, option ARMs...etc... Immigrants, illegals, foolish buyers, and stupid speculators...drove the mania ever higher.

      Now the HBs are using the billions of $$'s they got from Joe Sixpack's debt to buy back stock and hold up the prices. But the cycle has turned...and rates are rising. With hyper-inflation on the horizon the Fed must hike more, but the bubble will go fast. Millions who are buried in debt, will not be able to use their home ATMs anymore to pay the huge bills. Gas and commodity prices are soaring, and Joe can't pay for all the toys he bought on credit. FOUR TRILLION $'s in refi debt and NINE TRILLION from Uncle Sam in 4 1/2 years, made the economy look good, but it was all a debt-driven illusion. Here comes payback time.

      Those book values and balance sheets won't matter when there are no more buyers and only sellers. HBs will sell off the land, and there will be unfinished subdivisions and unemployed illegals everywhere...then it gets ugly...IMHO.

      • 1 Reply to maxhubris
      • <<Those book values and balance sheets won't matter when there are no more buyers and only sellers. HBs will sell off the land, and there will be unfinished subdivisions and unemployed illegals everywhere...then it gets ugly...IMHO.>>

        Wow! I assume you're anticipating Armageddon! I guess nobody will ever buy a new home again.

        Interestingly, in your scenario the well capitalized large public builders can easily live through any soft patches while the small builders, who currently account for 75% of the market, are toast and will have to sell of assets at fire sale prices.

        As for MDC, 50% of their assets will be converted to cash (at a positive margin) within the next 12-18 months. So a big chunk of book value here is pretty darn close to CASH value.

        I guess that doesn't matter either.

    • A lot of hedge funds are warming up to buy these names for the reasons you have posted....

    • trade what you see not what you think, you are thinking way too much!

 
MDC
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