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Build-to-Order Model & Solid Backlog Aid MDC Despite Lumber Woes

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M.D.C. Holdings, Inc. (MDC - Free Report) or MDC has been gaining strongly in recent times. The company’s last reported quarterly results were driven by the distinctive build-to-order operating model and customer-centric approach. Also, housing market fundamentals remained strong over the past few months, thereby supporting its growth.

Quick Glance at MDC’s 2020 Results

For 2020, home sale revenues and homes delivered increased 17% year over year. Gross margin also expanded 200 basis points year over year. The upside was backed by price increases implemented across communities over the past 12 months. Net new orders grew 40% in units and 56% in dollars from the past year. Monthly sales absorption also surged 36% year over year.

At 2020-end, homes under contract but not yet delivered (“backlog”) totaled 6,655 homes compared with 3,801 at 2019-end. The company witnessed significant resurgence in demand that resulted in an 87% year-over-year increase in backlog value to $3.26 billion at 2020-end.

Remarkable Build-to-Order Model

The Built-to-Order process provides buyers with a wide range of choices in major aspects of their future homes and personalized customer experience. This highly consumer-centric approach helps homebuyers to design a home with the features and amenities of their choice. It follows a strategy of initiating construction only after a purchase agreement has been executed. This reduces inventory risk, enhances efficiencies in construction, and provides greater visibility as well as predictability of future deliveries.

Owing to this model, net order growth for fourth-quarter 2020 led to a 92% year-over-year increase in net order value, which in turn fueled the expansion of backlog.

Affordable Homes Drive Profits

Although higher building material costs, land and labor shortages along with a rise in lumber prices are prompting homebuilders to increase home prices, MDC is consistent with the ongoing strategy of offering more affordable homes. In fact, the company is well positioned for 2021 on the back of affordable products, improving local market scale and strong geographic presentation.

Solid U.S. Housing Market Fundamentals

In addition to affordability, strengthening housing fundamentals are also benefiting the company and other industry players like D.R. Horton, Inc. (DHI - Free Report) , Meritage Homes Corporation (MTH - Free Report) and Toll Brothers, Inc. (TOL - Free Report) backed by low mortgage rates. Also, buyers are seeking homes in lower-density areas. This in turn is giving a boost to new home construction in such regions.

Sales of new single-family homes in the United States have seen 8.2% year-over-year growth for February. In fact, homebuilder sentiment inched one point higher in April, given solid demand trend. (Read more: Builders Regain Confidence in April: 5 Top Housing Picks)

MDC primarily benefits from focus on building single-family detached homes for first-time and move-up buyers.

Stock YTD Performance

MDC — a Zacks Rank #2 (Buy) stock — has gained 31% in the year-to-date period compared with the Zacks Building Products - Home Builders industry, Zacks Construction sector and S&P 500 Index’s 19%, 18.9% and 11% growth, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, earnings for 2021 are expected to grow 34.6% year over year. Also, its earnings are expected to rise 10.7% in the next three-five years. The company’s earnings surpassed analysts’ expectations in nine of the trailing 14 quarters.

A solid VGM Score of A is another reason for investors to believe in its fundamentals.

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