MDC – booming time in the immediate term

[i4value]

MDC is a US homebuilder. Over the long term, the US homebuilding sector is cyclical. But currently this sector is enjoying some sort of extraordinary boost. While the mortgage rates are high, house prices are also high due to a shortage of supply. So the home builders are having a good time currently with uptrends in the stock prices.

But I am a long-term value investor and I rather look at the performance of homebuilders over the cycle.



MDC is no-growth company in a no-growth cyclical sector.

• MDC had hardly any revenue growth over the past 18 years and should be valued based on its cyclical Earnings Power Value.
  
• MDC is a cyclical company as its performance is tied to US Housing Starts, where there was no growth in the long-term annual average over the past 70 years.
  

Any analysis, and valuation of MDC should be based on its EPV over the cycle. I assumed that the cycle is represented by the 2005 to 2022 performance. This is pegging it to the latest peak-to-peak Housing Starts cycle.

My valuation of MDC on an EPV basis and over the cycle showed that there is a 16% to 41 % margin of safety depending on how you calculate the gross profit margins. This is based on the view that there is no growth in the long-term annual average Housing Starts.

If you assumed that there is a 1/3 increase in the long-term annual average Housing Starts, the margin of safety would be greater than my 30% cut-off.

For more insights into US companies, go to “Are these outstanding stocks - what to consider? (Other Stock Exchanges)”