Coming off a positive fourth quarter earnings performance that netted the company earnings of $2.68 per share, the future would appear bright for M.D.C. Holdings.
The company had all the key metrics moving in the right direction from the same time last year. New orders were up 82%, backlog was up 55%, gross margins grew 590 basis points to 18.2%--even the company's billion-plus cash position grew, thanks to a greater-than-expected $142.6 million tax benefit. About the worst that could be said about the company was that its SG&A, as a percentage of revenues, was high relative to peers at about 19.7%, although it decreased in dollar value.
Moreover, management appeared to have a recipe for sales success going forward. Not only was its new line of smaller, more affordable homes generating sales volume, accounting for roughly 30% of new orders during the quarter, but also its spec strategy, which hinged on the idea of stopping spec construction at the drywall stage of construction to allow for buyer personalization, seemed to be working extremely well. The strategy allowed the company to grow its inventory of quick move-in homes--those that could close in fewer than 45 days--while preserving margin associated with design center options and upgrades.
With M.D.C. dominating the public builder pack with both its financial and operational execution, a myriad potentially wildly profitable business opportunities appear laid at management's feet. But when the fiscally conservative company will seize on any of them remains the big question for anxious company analysts, shareholders, business partners, and competitors.
Given the company's spending power potential--it recently secured $250 million in senior notes on top of the roughly $1.5 billion in cash sitting on its balance sheet--the opportunity to acquire not just assets but other companies clearly is there. And although M.D.C. management historically has held tight to the philosophy of organic growth versus acquisition, pressure mounts for the company to start spending, suggesting that management might take a marked departure and enter the M&A fray.
True to form, CEO Larry Mizel would neither confirm nor deny such suggestions from analysts during the company's 4Q2009 earnings call Friday. Instead, he responded in his typical enigmatic fashion with statements such as this:
"The adequacy of liquidity will be a compelling circumstance that will allow us to take advantage of market conditions."
And management is spending, following through on its promise of aggressive lot acquisition. In its fourth quarter alone, the company spent roughly $100 million on land acquisition, gaining control of 2,745 new lots in 52 new communities. And Mizel said the company had an "open buy order" in every one of its markets, meaning the door is open to anyone and everyone peddling lots.
But the urgency with which the company is acquiring lots could be accelerated by yet another issue. On Dec. 30, the company filed a Form 40-App, asking the Securities and Exchange Commission for an exemption from the terms of the Investment Company Act of 1940. The act states that if more than 40% of a company's total assets consist of "investment securities," the company should be reclassified as an investment company. Such a reclassification, given the company's concentration of assets in the cash category, could entangle M.D.C. in regulation that ultimately could potentially negatively affect the company.
However, senior vice president and CFO Chris Anderson told listeners on the earnings call that the filing was more or less a proactive move given the complexity of the legislation. He said:
"We've increased our cash so much and land and other assets have come down so much ... [that] we just want to be sure we don't end up with some unintended consequences."
And so for the moment, management seems comfortable with an open wallet policy, turning cash into hard assets.