For Immediate Release
Chicago, IL – July 10, 2013 – Zacks Equity Research highlights MDC Holdings (MDC-Free Report) as the Bull of the Day and Park Electrochemical (PKE-Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on the AmTrust (AFSI-Free Report), Markel (MKL-Free Report) and Travelers (TRV-Free Report).
Here is a synopsis of all five stocks:
Earnings estimates have been soaring for MDC Holdings (MDC-Free Report) as the homebuilder continues to benefit from a rebounding housing market. The significant increase in demand for new homes not only means higher revenues for MDC but also significantly higher profit margins as the company is able to raise prices and reduce incentives while leveraging its fixed expenses.
It is a Zacks Rank #1 (Strong Buy) stock.
MDC Holdings Inc. is a homebuilder that has been building under the name "Richmond American Homes" for 40 years. It primarily operates in the Western and Mountain regions of the United States with some exposure in the Eastern U.S.
The recent rise in interest rates has hurt shares of homebuilders like MDC, but the selloff could be a great buying opportunity as the fundamentals of MDC look very attractive.
MDC Holdings reported strong first quarter results on May 2. Earnings per share came in at 45 cents, crushing the Zacks Consensus Estimate of 26 cents. It was a huge increase over the 4 cents it reported in the same quarter last year.
Total revenue surged 77% to $344.3 million, well ahead of the consensus of $294.0 million. Home sale revenues rose a whopping 80% to $331.7 million, which was driven by a 64% jump in home delivered. The average selling price for homes closed rose 9% to $325,900.
The gross profit margin expanded 330 basis points to 17.4% of revenue as the company continued increasing prices and decreasing incentives as demand picked up considerably. Meanwhile, selling, general and administrative expenses fell from 18.5% to 14.5% of revenue as the company leveraged its fixed expenses.
Analysts revised their estimates meaningfully lower for both 2014 and 2015 following the company's most recent earnings miss on June 26. This sent the stock to a Zacks Rank #5 (Strong Sell) stock.
Despite this, shares currently trade at a premium on a forward P/E basis. Investors may want to avoid PKE until its earnings momentum turns around.
Park Electrochemical Corp. manufactures high-technology digital and RF/microwave printed circuit materials primarily for the telecommunications and internet infrastructure and high-end computing markets and advanced composite materials, parts and assemblies for the aerospace markets. Sales of printed circuit materials products account for approximately 85% of its total revenue.
Park Electrochemical reported somewhat disappointing first quarter fiscal 2014 results on June 26. Earnings per share came in at 25 cents, missing the Zacks Consensus Estimate by 4 cents. It was the company's third straight earnings miss.
The company continued to post lethargic top-line results. Net sales declined 6% to $43.4 million, which was well below the consensus of $47.0 million. Despite this, the operating profit margin expanded a solid 190 basis points which led to a 4% increase in net income.
Solutions for the Income Investor
Here are the Price to Book Ratios and Price to Earnings ratios for various types of insurers:
Insurance Brokerage: P/B 2.4, P/E 14.9
Bermuda Property/Casualty: Average Price to Book: 0.9, Average P/E: 10.3
Bond Insurers: P/B 0.8, P/E 9.1
Diversified: P/B 0.8, P/E 11.2
Life Traditional: P/B 0.8, P/E 12.1
P&C Builds Up Cash
Gather up all the facts and you can see this:
P&C cash flow over the last four quarters increased in a material way.
It reflected better paid loss ratios and higher premium growth. With modest growth in the economy raising premium volume further, and commercial insurers achieving mid-single-digit rate increases, cash flow should increase for P&C insurers over the next year too.
What about the headwinds?
The insurance rate environment in the P&C space is expected to soften somewhat in the next 12 months. Going forward, losses can diverge for different insurers. Exposure to catastrophic events always lurks in the P&C background, much like airlines and oil price shocks. Specific factors can make loss trends and rates different by line of P&C business.
However, this much should be clear to you. GDP growth raises P&C earnings and lowers macro risks. Bullish analysts add in a continued ‘normalization’ of catastrophes, couple it to high-single-digit rate increases and note a pricing dislocation in many individual insurance markets.
This is a medley of broad and specific factors. They can allow P&C insurers to grow cash flow at greater levels than those seen in softer markets. In early July, to no surprise, the P&C focused insurance industry is a Zacks Industry Rank of #41 out of 259 industries. Multi-line insurers are #27.
P&C insurers expected to see strong cash flow growth: AmTrust (AFSI-Free Report) a Zacks Rank #2 with an Outperform Rating and a dividend yield of 1.4%, Markel (MKL-Free Report) a Zacks Rank #3 with an Outperform rating, and Travelers (TRV-Free Report) a Zacks Rank #3 with an Outperform rating and a dividend yield of 2.5%.
Note I chose Outperform ratings over the current Zacks Rank. Most income investors are longer-term investors, meaning six months or more.
What comments sum it up for the besieged income investor?
Broaden your target. Don’t aim solely at high dividend yields. Focus on the underlying business case for building and sharing cash flow in an improving macro environment.
About the Bull and Bear of the Day
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