M.D.C. Holdings, Inc. is seeing the impact of 7% mortgage rates on new orders. This Zacks Rank #5 (Strong Sell) is expected to see a sharp decline in earnings next year as the housing market cools.
M.D.C. Holdings is a national home builder which subsidiaries operate under the name Richmond American Homes. It has homebuilding operations in many of the largest cities including Denver, Las Vegas, Phoenix, Los Angeles, San Diego, Washington DC, Orlando, Seattle, Boise, Nashville, Austin and Albuquerque.
It also has mortgage financing and insurance and title services, primarily for Richmond American homebuyers.
An Earnings Miss in the Third Quarter
On Oct 27, M.D.C. Holdings reported its third quarter results and missed on the Zacks Consensus Estimate by $0.26. Earnings were $1.98 compared to the Zacks Consensus of $2.24.
Revenue rose 12% to $1.4 billion year-over-year as the company delivered its extensive home backlog.
Excluding impairments, home sale gross margins expanded 120 basis points to 24.7% year-over-year. Unit deliveries fell 1% to 2387.
However, cancellations as a percentage of beginning backlog were up 970 basis points to 17.1% from 7.4% a year ago.
"Interest rate volatility and overall economic uncertainty took a toll on our sales efforts in the third quarter, as we experienced a slowdown in demand coupled with a sharp increase in cancellations," said Larry Mizel, MDC's Executive Chairman.
"Buyer psychology continued to be adversely affected by the negative news flow surrounding housing market conditions and the overall economy, leading to a disappointing net order result for the quarter," he added.
The company is focusing its sales efforts on inventory that can close this year to generate cash flow. It also said that it has a seasoned management team that has been through slowdowns before.
Big Earnings Decline Expected for 2023
M.D.C. Holdings' unit backlog decreased 30% to 5338 homes in the third quarter. With sales also slowing, it's not a surprise that analysts believe earnings will be lower in 2023.
1 estimate has been cut in the last 30 days for 2023, pushing the Zacks Consensus down to $5.41 from $8.21 in the last 90 days.
This is an earnings decline of 40.5% as the company is expected to make $9.10 in 2022.
Shares are Cheap
The home builder stocks have plunged in 2022 as mortgage rates have risen. M.D.C. Holdings is down 46% year-to-date.
But you can also see the plunge in the earnings that are expected in this price and consensus chart.
Image Source: Zacks Investment Research
M.D.C. Holdings is still trading with an extremely low P/E of just 3.4.
It also pays an industry-leading dividend, currently yielding 6.4%.
But the Homebuilders are in the bottom 1% of the Zacks Industry Rank. It ranks 247 out of 250 industries as those earnings estimates are coming down quickly.
I would be careful of value traps.
With housing market conditions changing quickly, investors might want to stay on the sidelines until there is some clarity about how low home sales will go.
Image: Bigstock
Bear of the Day: M.D.C. Holdings (MDC)
M.D.C. Holdings, Inc. is seeing the impact of 7% mortgage rates on new orders. This Zacks Rank #5 (Strong Sell) is expected to see a sharp decline in earnings next year as the housing market cools.
M.D.C. Holdings is a national home builder which subsidiaries operate under the name Richmond American Homes. It has homebuilding operations in many of the largest cities including Denver, Las Vegas, Phoenix, Los Angeles, San Diego, Washington DC, Orlando, Seattle, Boise, Nashville, Austin and Albuquerque.
It also has mortgage financing and insurance and title services, primarily for Richmond American homebuyers.
An Earnings Miss in the Third Quarter
On Oct 27, M.D.C. Holdings reported its third quarter results and missed on the Zacks Consensus Estimate by $0.26. Earnings were $1.98 compared to the Zacks Consensus of $2.24.
Revenue rose 12% to $1.4 billion year-over-year as the company delivered its extensive home backlog.
Excluding impairments, home sale gross margins expanded 120 basis points to 24.7% year-over-year. Unit deliveries fell 1% to 2387.
However, cancellations as a percentage of beginning backlog were up 970 basis points to 17.1% from 7.4% a year ago.
"Interest rate volatility and overall economic uncertainty took a toll on our sales efforts in the third quarter, as we experienced a slowdown in demand coupled with a sharp increase in cancellations," said Larry Mizel, MDC's Executive Chairman.
"Buyer psychology continued to be adversely affected by the negative news flow surrounding housing market conditions and the overall economy, leading to a disappointing net order result for the quarter," he added.
The company is focusing its sales efforts on inventory that can close this year to generate cash flow. It also said that it has a seasoned management team that has been through slowdowns before.
Big Earnings Decline Expected for 2023
M.D.C. Holdings' unit backlog decreased 30% to 5338 homes in the third quarter. With sales also slowing, it's not a surprise that analysts believe earnings will be lower in 2023.
1 estimate has been cut in the last 30 days for 2023, pushing the Zacks Consensus down to $5.41 from $8.21 in the last 90 days.
This is an earnings decline of 40.5% as the company is expected to make $9.10 in 2022.
Shares are Cheap
The home builder stocks have plunged in 2022 as mortgage rates have risen. M.D.C. Holdings is down 46% year-to-date.
But you can also see the plunge in the earnings that are expected in this price and consensus chart.
Image Source: Zacks Investment Research
M.D.C. Holdings is still trading with an extremely low P/E of just 3.4.
It also pays an industry-leading dividend, currently yielding 6.4%.
But the Homebuilders are in the bottom 1% of the Zacks Industry Rank. It ranks 247 out of 250 industries as those earnings estimates are coming down quickly.
I would be careful of value traps.
With housing market conditions changing quickly, investors might want to stay on the sidelines until there is some clarity about how low home sales will go.