While using the GuruFocus All-in-One Screener, a Premium feature, to screen the market for stocks with a GF Score of at least 90 out of 100 and a dividend yield of at least 4%, I came across M.D.C. Holdings Inc. (MDC, Financial), a homebuilding and financial services company that operates in 28 U.S. states. Based in Denver, Colorado, it has a market cap of $2.67 billion and had 2022 revenue of $5.71 billion. It has a GF Score of 98 out of 100, indicating a high potential for outperformance based on a historical study by GuruFocus, and a dividend yield of 5.43%, showing commitment to shareholder returns.
About MDC
As the below GuruFocus chart detailing the company's income statement chart shows, M.D.C. Holdings generates most of its revenue from building houses, particularly in the West region:
It explained in its 10-K for 2022: “Our homebuilding operations consist of wholly owned subsidiary companies that generally purchase finished lots or develop lots to the extent necessary for the construction and sale primarily of single-family detached homes to first-time and first-time move-up homebuyers under the name 'Richmond American Homes.' Our homebuilding operations are comprised of various homebuilding divisions that we consider to be our operating segments.”
West, Mountain and East refer to the geographic regions of the states in which it operates. California, Colorado and Arizona deliver the most revenue to the company.
The financial services division consists of multiple subsidiaries that originate mortgages for its homebuyers, insurance coverage for its builders and subcontractors, a re-insurer and a title/escrow agency.
As a company with homebuilding at its core and responsible for most of its revenue, we should be wary of economic headwinds and cyclicality. As the chart below shows, revenue dropped off severely in the financial crisis, though the homebuilding industry is trying to avoid a repeat of this by intentionally underbuilding ever since then.
I won’t go so far as to say the industry has made itself recession proof, but I do believe the historical underbuilding should help keep prices high for some time yet, even despite the struggling economy. Moreover, once interest rates are lowered again, the homebuilding industry could rebound.
Competition
Both the homebuilding and financial services industries see heavy competition, due in part to low barriers to entry. Any contractor with modest financial backing can get into the business, though of course it takes much more mettle to do it at scale. Until recently, M.D.C. Holdings had outperformed both the S&P 500 and a peer group since 2017, as shown in this chart from the company's annual filing:
Members of the peer group include 10 other companies, including better-known names such as D.R. Horton Inc. (DHI, Financial), Lennar Corporation (LEN, Financial) and PulteGroup Inc. (PHM, Financial).
M.D.C. Holdings claims some competitive advantages. It highlights its design centers, or Home Galleries, as one of them. These centers allow customers to personalize their homes through options and upgrades.
Having a financial services arm should also help with its moat, since home buyers do not need to go to third-parties, such as banks, for their mortgages. And, of course, financial services add revenue and reduce costs.
GF Score
The company has a market-leading GF Score of 98 out of 100, with the only detractor being middling financial strength.
Financial strength
GuruFocus gives M.D.C. Holdings a 6 out of 10 ranking for financial strength. At the end of 2022, the company has $1.669 billion in short- and long-term debt as well as $1.275 billion in cash, cash equivalents and marketable securities.
Because of the way its debt is structured, M.D.C. did not make any interest payments in 2022 (nor in the eight previous years). As a result, the interest coverage ratio is not applicable. Its operating income in 2022 was $774 million.
Given this clear favorable structure, I believe M.D.C.’s finances are much stronger than the 6 out of 10 rating would suggest. While I would not argue its situation is as good as that of a company with no debt, this appears to be the next best thing.
Profitability
Based on the factors in the chart below, M.D.C. receives a 10 out of 10 ranking for profitability. The operating and net margins are considered above average for the homebuilding and construction industry at 13.54% and 9.83%.
The operating margin has risen over the past 10 years at a clip of 14.24% per year on average, while over the past five years it has grown by an average of 17.45% per year.
The company has a Piotroski F-Score of 6 out of 9 and a business predictability ranking of 5 out of 5 stars.
Growth
The company gets a full 10 out of 10 growth ranking, based on factors such as its three- and five-year revenue growth, the predictability of that growth and its five-year Ebitda growth.
Growth rates have accelerated even more recently. Revenue per share has grown by an average of 17.9% per year for the past three years. Earnings per share without non-recurring items has grown 31.4% per year on average for the past three years.
Turning to free cash flow, the three-year average growth rate of 192.30% looks good, too good to be true, and it is. According to its statement of cash flows, operating activities brought in cash flow of $905 million in 2022, compared to a loss of $208 million in 2021, so the comparison there kind of skews the matter.
The company reported in its fourth quarter and full year 2022 news release, “Consistent with our operating strategy, we have been diligent in managing our land position to align with current market conditions.” David Mandarich, the company's president and CEO, said, “By acting decisively, we generated considerable cash flow in 2022.”
Dividends and share repurchases
The dividend yield has benefited from the falling share price, but don’t discount M.D.C.’s dividend raises. It has ambitiously increased the dividends per share as earnings per share have grown. Over the past five years, it increased the dividend per share by an average of 19.57% a year. It currently pays $0.50 per quarter or $2.00 per year for a dividend yield of 5.43%.
It has not bought back shares in the past five years; instead, the number of shares outstanding has been creeping up by an average of 2.19% per year.
Valuation
The company gets another full 10 out of 10 ranking for valuation. The closing share price on Feb. 24 was $36.80, which is well below the GF Value chart's estimated fair value of $51.76, making it modestly undervalued.
The GF Value is based on several historical multiples, an adjustment factor for previous returns and growth and an estimate of its future performance.
M.D.C. is one of the few stocks considered undervalued by most or all of the GuruFocus valuation box's measures:
Gurus
The top investing gurus who held shares of M.D.C. at the end of the fourth quarter of 2022, according to 13F filings, were: Jim Simons (Trades, Portfolio) of Renaissance Technologies (275,420 shares), Ken Fisher (Trades, Portfolio) of Fisher Asset Management (150,594) and Paul Tudor Jones (Trades, Portfolio) of Tudor Investment Corp. (79,802).
Institutional investors owned 62.69% and insiders owned 7.83% of shares outstanding.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Conclusion
I have found few companies or stocks with such an exceptional set of fundamentals as M.D.C. As we’ve seen, M.D.C. Holdings delivers consistent revenue and earnings growth despite its industry. It has excellent profitability and growth metrics, and its financial strength may be better than its 6 out of 10 ranking would suggest. The dividend is more than double the S&P 500 average and shares are available at a bargain price.
