Despite very good operating performance thus far in 2018, shares of homebuilder MDC Holdings (MDC) haven’t enjoyed the same success, as investors have remained concerned about the possibility of higher interest rates and their impact on margins and sales, suggests value investor John Buckingham, money manager and editor of The Prudent Speculator.
That said, MDC Holdings turned in a strong Q2 and received some analyst upgrades. The homebuilder posted adjusted EPS of $1.12, 31% better than consensus estimates of $0.85. Revenue for the three-month period was $771 million (versus expectations of $713 million).
We were happy to see year-over-year gross margins expand and for business backlog to hit $1.95 billion (16% higher than at the end of Q2 2017).
MDC CEO Larry A. Mizel stated, “We continued to see healthy demand in our markets, especially at affordable price points, which allowed us to raise prices in a majority of our communities during the quarter. We believe we are well positioned as we head into the second half of the year, given the strong fundamentals we see in our markets and our positioning within those markets.”
We like the company's focus on first time buyers (many Millennials) with its Season collection of homes. We continue to like the stock and the fact that shares trade at 8.1 times NTM adjusted EPS expectations and offer investors a 4.0% dividend yield.
While interest rates will most likely move higher in the coming months, they remain at levels that are very low on the historical spectrum. Additionally, the U.S. economy continues to be healthy, with a favorable outlook for employment, consumer confidence and potentially higher wages for its prospective customers.
MDC Holdings sports a broad geographic footprint, boasts successful cost control initiatives and maintains a solid balance sheet, with ample liquidity that the company can use to smartly acquire land in attractive markets. Our target price for the shares now stands at $52.
