A Few Reasons Why MDC Holdings Looks Like a Good Long-Term Buy

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Mar 30, 2015

The recovering housing market is creating good opportunities for home builders to improve their financial performance. One such key player in this market is MDC Holdings (MDC, Financial), which recently ended fiscal 2014 on a positive note, delivering impressive growth in the fourth quarter. However, the company fell shy of earnings estimates, but with the growth in revenue on an year-over-year basis, MDC Holdings seems well-positioned for a better financial performance in 2015.

MDC's moves

To be profitable in future and to deal with the expected challenges near term, MDC is focusing on various strategic initiatives. It is largely focusing on bottom line expansion which will support its smooth flow. In fact the company has already reduced its interest costs, also extending its next senior note maturity to 2020 by eliminating $500 million of existing senior notes. It has also issued new senior notes worth $250 million. These are some wise moves by the company as it will surely help it see expansion in both top and bottom line even in the cloudy housing market conditions.

As analysts are expecting the housing market to remain slow initially, MDC is undertaking conservative approach towards its operations and is mainly focusing on exhibiting an attractive balance sheet. In addition, it is also targeting investment as one of its key growth driver. It is now investing in only those new projects which it thinks to provide it an opportunity to turn on its inventory, delivering solid returns.

As MDC enters new fiscal year, it is expecting soft performance in the initial quarters of 2015. Not only the slow cloudy housing market landscape, but there are some other headwinds too that MDC Holdings is likely to face. Global economic weakness is also an issue that is affecting the almost every segment ranging from falling energy prices to soft housing market. In addition, MDC is also concerned about some grave industry issues such as rising costs and mortgage availability which are also expected to impact the company’s smooth flow towards profitability.

Some bright spots

Besides these short term crunches and headwinds there are some positive points also that can help MDC in keeping its spirits high. There are some positive signs coming out from the mortgage industry. For example the recent changes announced by FHA such as increase in the FHA low limit as well as reduction in the mortgage insurance premium for FHA loans will surely help in expanding credit availability. In addition, MDC is also pleased with the improvement in the customer confidence due to good improvement in the employment levels. This will lead demand for the new homes to grow which will be further supported by low interest rates. All these facts are help MDC Holdings even in this soft market condition.

Now moving on to the fundamentals, the stock is reasonable with a trailing P/E of 20.66 while the forward P/E of 13.06 shows good growth in the earnings in the near term. It can also stay attractive to the investors with a decent profit margin of 3.73% which will increase as the market regains its lost glory. Considering all these aspects, MDC Holdings is definitely a stock worth your dollars as of now. But for the long term gains the investors should wait for the housing market to return to its full glory.