M.D.C. Holdings Gets A Downgrade From Deutsche Bank

Deutsche Bank’s Nishu Sood believes the most recent strategy shift by M.D.C. Holdings, Inc. MDC “to increase the emphasis on volumes relative to margins has been successful to the extent that the company's earnings outlook has stabilized.”

Sood downgraded the rating on the company from Buy to Hold, while lowering the price target from $28 to $27.

Limited Returns

The analyst mentioned that the company’s balance sheet efficiency has also improved, although even with these improvements accounted for in the forecasts, the expected returns on equity continue to be “subpar” for M.D.C. Holdings.

“In other words, MDC does not generate positive economic returns in our forecasts,” Sood explained, while adding that the maturing housing cycle is likely to limit returns on the stock.

Related Link: Notable Stocks Trading Ex-Dividend Monday, August 8

2Q16 Results

The 2Q16 results were mostly in line with the preannouncement and implied positive absorption trends and improvements in the backlog turnover ratio, relative margin stability and ASPs continuing to improve.

“Management tone regarding demand conditions is positive as well. The overall takeaway from 2Q16 results is incrementally positive for the earnings outlook,” according to the Deutsche Bank report.

However, even with these trends persisting, the analyst believes they do not drive earning high enough to significantly improve M.D.C. Holdings’ return profile.

“The problem remains MDC’s margin profile which has a worst of both worlds combination of low gross margins and persistently high sg&a,” Sood explained.

Do you have ideas for articles/interviews you'd like to see more of on Benzinga? Please email feedback@benzinga.com with your best article ideas. One person will be randomly selected to win a $20 Amazon gift card!