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Why Buy Strategy is Apt for MDC Homebuilding Stock Right Now

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Indeed, favorable housing fundamentals that exist today are strengthening not only M.D.C. Holdings, Inc. (MDC - Free Report) but other homebuilding stocks like Lennar (LEN - Free Report) , D.R. Horton (DHI - Free Report) and Meritage Homes Corporation (MTH - Free Report) . That said, MDC is worthy of a special mention not only because of a resilient housing backdrop but also due to its strategic focus, which targets the more affordable segment of the market and adheres to the build-to-order operational model.

MDC shares have gained 25.3% so far this year, outperforming the Zacks Building Products - Home Builders industry’s 22.5% rally. Earnings estimates for the second quarter, third quarter and full-year 2021 have edged up 7.6%, 8.2% and 7.4%, respectively, over the past 30 days. This trend signifies bullish analyst sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

It also has a solid earnings surprise history. MDCs earnings surpassed the Zacks Consensus Estimate in seven of the trailing nine quarters.

Zacks Investment ResearchImage Source: Zacks Investment Research

A Look at Q1 Performance

MDC delivered strong profitability for first-quarter 2021, generating earnings of $1.51 per share, significantly up from 52 cents a year ago. Revenues of $1,087 million grew 51.2% year over year. Home sale revenues grew 49% year over year on a 41% increase in closings and 6% rise in average selling prices. It also expanded home sales gross margins by 200 basis points (bps) and improved SG&A leverage by 180 bps.

Focus on Build-To-Order Approach & Affordable Price Points: A Boon

A desire for new home customization among buyers has been driving MDC’s performance. The company seeks the Built-to-Order process, which 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.

Apart from this approach, MDC is uniquely positioned to succeed in today's market, thanks to its persistent focus on more affordable price points.

MDC ended the first quarter with 7,686 homes in backlog, reflecting a 65% increase year over year. On a dollar value basis, backlog was $3.9 billion that marks the highest quarter-end backlog value in the company's history. This gives it a great visibility into the remainder of 2021 and enables the company to focus more on efforts to maximize profitability with the existing sales efforts.

Solid Earnings & Revenues Growth Rate

Given strong backlog, MDC remains well positioned to deliver full-year 2021 home deliveries between 10,000 and 11,000, indicating an increase from 8,158 units in 2020. It has solid prospects, as is evident from the expected earnings growth rate for 2021, which is pegged at 59.4%. The Zacks Consensus Estimate for 2021 revenues indicates an increase of 42% from a year ago.

Higher ROE

MDC’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 21.6% compares favorably with the industry average of 15.2%, implying that it is efficient in using shareholders’ funds.

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