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M.D.C. Holdings, Inc.'s (NYSE:MDC) Shares Lagging The Market But So Is The Business

Simply Wall St
·3 min read

With a price-to-earnings (or "P/E") ratio of 11.4x M.D.C. Holdings, Inc. (NYSE:MDC) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 35x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

M.D.C. Holdings certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for M.D.C. Holdings

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on M.D.C. Holdings.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like M.D.C. Holdings' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.1% last year. This was backed up an excellent period prior to see EPS up by 95% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the six analysts covering the company are not good at all, suggesting earnings should decline by 15% over the next year. With the rest of the market predicted to shrink by 7.1%, it's a sub-optimal result.

In light of this, it's understandable that M.D.C. Holdings' P/E sits below the majority of other companies. Nonetheless, with earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Even just maintaining these prices could be difficult achieve as the weak outlook is already weighing down the shares heavily.

What We Can Learn From M.D.C. Holdings' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of M.D.C. Holdings' analyst forecasts revealed that its even shakier outlook against the market is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. However, we're still cautious about the company's ability to resist even greater pain to its business from the broader market turmoil. In the meantime, unless the company's prospects improve they will continue to form a barrier for the share price around these levels.

Having said that, be aware M.D.C. Holdings is showing 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

If these risks are making you reconsider your opinion on M.D.C. Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.