M.D.C. gets shout-out


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M.D.C.'s Richmond American Homes offers this model in Highlands Ranch.

My Kiplinger’s magazine arrived today and on page 19 there was an article by James. K. Glassman titled “Buy Builders If You Dare.”

In the lede, as we call the opening sentence in newspaper lingo, Glassman, in his “Opening Shot” column, had this to say: “Suggest – just suggest- that now might be a good time to buy the stocks of homebuilders, and you will almost certainly be considered out of your mind. Few sectors have fallen so far so fast, and prospects still appear dim.” Glassman, executive director of the George W. Bush Institute in Dallas, and author of Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence, goes on to say that despite all of the woes hammering the homebuilding market, if you believe in efficient markets, the share price of the homebuilding stocks already have been discounted. In other words, they are value plays.

He also noted that most of the surviving public companies have kept their balance sheets intact. “Consider M.D.C. Holdings (MDC), a smallish builder based in Denver that generated $1 billion in sales last year. Debt is $1.2 billion, but M.D.C. is sitting on $1.5 billion in cash, and it pays just $64 million in interest annually to service its long-term debt.” I’m not sure I would call M.D.C. “smallish.” After all, it is one of the 10 largest builders in the country. M.D.C. is parent of Richmond American Homes. It is headed by Larry Mizel and David Mandarich.

M.D.C. called a buy in 2009

Interestingly, the magazine used the same headline on a story in February 2009, by a different author, who also recommended M.D.C. At that time, Kiplinger’s wrote: “The most-conservative builders are the best positioned to thrive once the economy rebounds. NVR (symbol NVR) and M.D.C. Holdings (MDC) are unique for their small land inventories. At current building rates, M.D.C.’s inventory would last 1.4 years, compared with the industry average of 3.6 years. And NVR’s inventories are nonexistent; it pays third-party owners for the option to buy lots within a certain period of time, but the company can always walk away from a deal and forfeit what it paid for the option. At last report, NVR’s outstanding land options were worth just $29 million. With more cash than debt, both can snatch up cheap land when demand turns around. NVR, whose stock traded in early March at $321, has cash worth $1.15 billion, or $207 per share, on its balance sheet. M.D.C., which traded at $23, holds $1.4 billion, or $29 per share (both figures are before taking debt into account). “There’s NVR, there’s M.D.C., and then there’s everybody else,” says Morningstar analyst Eric Landry.

M.D.C.’s shares were trading at $24.14 (adjusted for dividends) the day the 2009 article was published and closed at $24.73 today. In other words, you would have made a 2.4 percent gain if you took Kiplinger’s advice in 2009. You would have been much better off buying NVR in 2009. Its stock more than doubled. It closed at $727.80 per share today (that’s right, more than 700 bucks a share), while you could have picked up  a share at a mere $347.55 on Feb. 20, 2009, netting yourself a 109.4 percent gain. (I can’t resist mentioning that February 2009 was when E.W. Scripps Co. (SSP)  closed the Rocky Mountain News, my former employer. Scripps’s stock was trading at $1.40 a share the day that Kiplinger’s recommended M.D.C. in 2009. It closed today at $9.33, which would have given you a 566.4 percent return if you backed up the truck and loaded up on SSP just before it closed the Rocky.)

Coincidentally, today was a bad day for M.D.C. and many other homebuilders. M.D.C.’s stock fell by 3.5 percent today, in the wake of the quarterly report by competitor KB Home, which reported its losses had more than doubled from the same period a year ago. For the quarter ending May 31, KB Home reported a loss of $68.5 million, or 89 cents per share, compared with a year-earlier loss of $30.7 million, or 40 cents per share.

KB Home shares fell by 15.4 percent. M.D.C., meanwhile, is much closer to its 52-week low of $24.09 than its 52-week high of $32.40. M.D.C. also sports a 3.9 percent yield.

Do you think M.D.C. is a good investment at these levels?

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Contact John Rebchook at JRCHOOK@gmail.com.

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John Rebchook

John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.

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