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M/I Homes, Inc. Message Board

  • runn104 runn104 Jul 10, 2012 10:48 PM Flag

    MHO is worth less than $10 a share

    The valuation of MHO common is so high that it borders on the absurd.

    The company has an Enterprise value of around $600 million. And they generated about $25 mm of EBITDA in the last 12 months. That is an EV/EBITDA of around 20x+. Totally insane.

    Even if we assume 2012 is a much improved year, and they generate $40 million of EBITDA, the EV is still 15x EBITDA. If they do have such a good year, they will burn through their currently developed lots and have to spend a lot of capital developing new lots (+$125 million). And, given their current margins, they aren't making sufficient profit margins on existing developed lot inventory. Given today's profit margins, it will not make economic sense to develop more lots. But, they will have to 'feed the machine' as it is referred to in the home building industry. MHO has been a poor allocator of capital. Things will get worse for them, IMO.

    The company has $100 million of preferred shares outstanding. They issued them a few years ago. They made interest payments for a short while until they were halted due to the covenants in other debt ranked higher in the capital structure. Due to the restricted payments basket in the bank debt (or bonds) , MHO is no longer making interest payments to the pref stock. If they were, it would amount to about $10 million. That's right. $10 million a year. About ($.55 per share). Someday, they will have to make those payments, if they ever become profitable enough. It seems to me that investors are just assuming that the preferred shares don't exist. They do. And they rank ahead of the common in the capital structure.

    MHO mgt should take advantage of the current high value of the shares and do a secondary. That's their only way out. Otherwise, I think the shares are destined to fall back below $10. Really, I think they go below $10 no matter what management does with respect to a secondary. As a side note, I have listened to their conference calls and find management to provide information that is misleading, at best. If they don't issue shares here, the only explanation in my view, is that management is waiting to sell as many of their own shares as they can when any insider restriction windows open up. Time will tell if I am right or wrong.

    They only have 3,000 paved lots on the books. That's a little over a year's supply. However, we don't know where those paved lots are located. The company doesn't provide that data. If a big portion of those are in Columbus, and there is a shortage of paved lots in other markets, then they will have to acquire land and develop more lots in their other markets. They just don't have the cash for that if it is a large amount.

    I'll end it here and see if anyone is paying attention and interested in discussing. I think this stock trades below $10 again. It is very overvalued.

    Full disclosure, I am short MHO.

    I'd love to hear your thoughts, questions, comments.

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