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Here's Why You Should Hold M.D.C Holdings in Your Portfolio

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M.D.C. Holdings, Inc. (MDC - Free Report) , one of the largest homebuilders in the United States, is poised to gain from its focus on more affordable product offerings and solid backlog. Moreover, upward revision in earnings estimates for the current quarter and year reflects analysts’ optimism surrounding the company’s earnings potential. Over the past month, earnings estimates for the current quarter and year have inched up 2.7% and 1.3%, respectively.

Let’s delve deeper and try to consider the factors working for this Zacks Rank #3 (Hold) company.

Shift Toward Affordable Home Series to Drive Growth

M.D.C. Holdings focuses on more affordable product offerings which is likely to drive volumes and profits considering the affordability concerns of the buyers given rising home prices scenario in the industry of late. The company is optimistic about its affordable growth strategy as it will attract first-time buyers, which is expected to boost the company’s top line. The company believes that its affordable product transition will provide the best return on investment in the housing market. Thus, the company’s commitment to customer satisfaction, quality and value raises analysts’ optimism on its growth potential.

Strong Backlog Position

At the end of the third quarter of 2018, backlog value grew 6% year over year to $1.8 billion. Strong backlog value of the company determines its revenue growth potential.

Robust 2018 Performance

Apart from solid backlog position, the company has put up a strong year-to-date show. In the first nine months of 2018, home sale revenues increased 18.2% to $2,123 million. In fact, in third-quarter 2018, home sale revenues increased 31% to $766 million. Gross margin from home sales, excluding impairments, rose 210 basis points to 19.2% in the third quarter. SG&A expenses as a percentage of home sales came in at 10.9% in the quarter, a 90-bps improvement.

Though third-quarter new home sales show growth at a lower rate compared to the past few years, the company is optimistic about the years to come given the strength in underlying fundamentals.

Meanwhile, the Zacks Consensus Estimate for current-quarter earnings is pegged at $1.15, which marks year-over-year growth of 94.9%. Also, the Zacks Consensus Estimate for current-year earnings is pegged at $3.88, which marks year-over-year growth of 50.4%.

Unfavorable Homebuilding Scenario Could Mar Growth

Due to the ongoing headwinds, the homebuilding industry collectively has declined 32% in the past year. M.D.C. Holdings' shares have also declined 10.6% during the same period.

Presently, homebuilders are facing the brunt of rising mortgage rates, higher construction costs, shortage of skilled labor and a dearth of buildable lots. In fact, lower supply of homes has pushed home prices higher in several parts of the country. This in turn affects the affordability for buyers, thereby impacting top-line growth of homebuilders.

Meanwhile, rising land and labor costs are eating into homebuilders’ margins. Not only this, homebuilders are distressed by higher aluminum and steel costs as a consequence of the newly-imposed tariffs. This, coupled with higher lumber prices owing to an import tariff, is denting builders’ margins.

Due to the industry headwinds, national new home sales have slowed down during the third quarter, relative to the robust increases seen during the past few years. However, the company believes that this is an expected part of a housing cycle and the industry still has the potential for continued expansion, given the strength in the underlying fundamentals, courtesy of steady job and wage growth and solid economy.

Stocks to Consider

Some better top-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , Altair Engineering Inc. (ALTR - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes sports a Zacks Rank #1 (Strong Buy), Altair Engineering and EMCOR carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes’ 2018 earnings are expected to increase 111%.

Altair Engineering has an expected earnings growth rate of 23.1% for the current year.

EMCOR has a projected earnings growth rate of 20% for the current year.

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