M.D.C. Wins Double Upgrade From BofA On Earnings Beat, Positive Sector Outlook

Homebuilder M.D.C. Holdings, Inc. (NYSE: MDC) reported better-than-expected second-quarter earnings Wednesday, prompting an upgrade from Bank of America Merrill Lynch. 

The Analyst

Analyst John Lovallo upgraded M.D.C. Holdings from Underperform to Buy and raised the price target from $36 to $42.

The Thesis

Another solid quarter and a positive iew of the U.S. homebuilding industry were key reasons for the upgrade, Lovallo said in the Thursday upgrade note. 

M.D.C. reported Q2 adjusted EPS of $1.12, higher than Lovallo's estimate and the Bloomberg consensus of 85 cents. Home sales revenue of $750 million and the operating margin of 8.2 percent were also above expectations, the analyst said.

The homebuilder's 234-basis-point gross margin expansion is particularly encouraging, he said. 

BofA raised earnings per share estimates for the next three years and increased 2018 EPS from $3.30 to $3.90, 2019 EPS from $3.75 to $4.00 and 2020 EPS from $4.00 to $4.20.

The new $42 new price target is based on 10.5 times the 2019 price-to-earnings ratio, in-line with the historical range. The previous price target was calculated by applying an 11 times multiple to 2018 EPS.

The Price Action

M.D.C. shares were trading up 1.59 percent to $30.75 at the time of publication Thursday. 

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