Analysts support Denver homebuilder

Bloomberg

M.D.C. Holdings Inc. is unique among homebuilders: most analysts recommend buying the stock. "It’s one of the few homebuilding companies that I think really has been on top of things," said Mark Levine, director of the Burns School of Real Estate and Construction Management at the University of Denver.

M.D.C., the Denver-based builder of Richmond American Homes, avoided loading up on land and taking on too much debt in the housing boom, said Robert Curran, the lead homebuilding analyst for Fitch Ratings in New York. As the median price for a new U.S. home climbed 50 percent to almost $263,000 and sales rose to a record 1.4 million a year, M.D.C. resisted expanding too fast. "That’s been perceived by all types of investors as a prudent course," Curran said.

Poised to Buy
The builder’s strategy may allow it to spend more buying cheap property when the market stabilizes, according to Vicki Bryan, a bond analyst at Gimme Credit LLC.

M.D.C. owned or controlled 10,514 lots at the end of September, according to a regulatory filing, the fewest in the 15-member Standard & Poor’s Supercomposite Homebuilding Index. Ryland Group Inc., M.D.C.’s closest competitor by revenue, had 29,132 lots. M.D.C.’s earliest debt maturities are in 2012 and its debt-to-capital ratio is 42 percent, compared with a 47 percent average for competitors.

The company also has avoided joint ventures, off-balance-sheet entities and the high-rise condominium business, Chief Executive Officer Larry Mizel, 66, said Jan. 14 at a Credit Suisse conference in New York.

"We’re not busy dealing with sideshows," he said. "We have been very conservative in how we’ve run our business."

Mizel declined to comment for this story. M.D.C. customers are entry-level and first-time "move-up" buyers. Its average home price in the third quarter was $301,700, down 9 percent from 2007.

Beth and David Wolfford were the first residents of Richmond American’s Madison Grove development in Culpepper, Virginia, in 2005. They spent about $600,000 on their two-story, four-bedroom house of about 5,000 square feet, Beth Wolfford, 50, said in a telephone interview.

"There’s been no major problem," she said. "Everybody’s always complimenting us on how beautiful the home is."

In the third quarter, M.D.C. sold 60 percent of its homes in Arizona, Nevada and California, three states in the nation’s top five with the most foreclosures in 2008, according to RealtyTrac Inc., an Irvine, California-based seller of default data.

Homebuilders are lowering the prices to compete with foreclosures, said Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University in College Station.

The average price for an M.D.C. home in Arizona fell 17 percent in the third quarter to $206,200. In Nevada it fell 17 percent to $243,300. In California, it dropped 12 percent to $435,500.

Revenue Slides
The housing recession has led to eight straight quarterly losses for M.D.C. Revenue fell 47 percent in the third quarter and new orders plunged 46 percent.

Most analysts aren’t recommending homebuilding stocks, said Keven Lindemann, director of the real estate group at SNL Financial in Charlottesville, Virginia.

The U.S. had an 11.5 months’ supply of new homes for sale in November, just below the record 11.8 months’ supply in October, according to Commerce Department data. The average supply since 1963 is 6.1 months. "Most of these stocks have been beat up pretty good," Lindemann said. "I don’t think it’s so much a valuation issue. It’s more that there are some large fundamental issues with the economy."

M.D.C. learned the hard way how to navigate the housing slump. The housing and economic recession of the late 1980s and early 1990s forced the company into "a major restructuring," according to a regulatory filing.

"You probably won’t see a recovery in housing until 2010," said Kirr Marbach & Co. analyst Dave Crossman. "You’re still just working through some pretty ugly news."