M.D.C. Holdings will report its fourth quarter and full-year 2009 earnings before the market opens Feb. 5, and analysts are expecting the company will post an earnings improvement. Wall Street consensus is that the company will report earnings per share of ($0.17) for the quarter, compared with a 3Q2009 loss of $0.69 per share, or $32 million.
Whereas many of the company's peers were able to exceed analysts' earnings estimates during their fiscal fourth quarters thanks to some significant tax benefits resulting from the extended net operating loss tax carryback legislation, the upside for M.D.C. could be limited in comparison because of the company's low lot inventory. At the end of 3Q2009, the company counted 6,624 owned lots in its pipeline, suggesting that even if the company was motivated to dump lots in the name of a clawback, the ultimate dollar benefit could be constrained relative to peers.
In fact, it's likely that company will have continued on its agressive land-buying spree during the fourth quarter, as it reloads its lot pipeline with lower-priced land in preparation for growth. In the third quarter, the company announced that it tied up almost 1,300 lots during the quarter, a move that analysts applauded given the company's impressive cash reserves.
As analysts from Raymond James noted following the third quarter results:
"With its war chest of $1.6 billion in cash and marketable securities and its relatively limited supply of land, we believe MDC has the willingness and ability to deploy substantial capital on attractive new land assets, which should also benefit gross margins and accelerate market share gains."
However, several analysts noted that despite its ability to pay cash for land, the company was facing stiff competition for finished lots.
Despite the near-term hurdles related to tying up lots, most analysts appeared to expect improving margins and sales rates going forward. From a report by analysts at Raymond James:
"In our view, 3Q results indicate that MDC's smaller, more affordable homes are gaining traction with buyers, as new orders surged 140% y/y on a per-community basis. Specifically, these homes consisted of over 20% of MDC's overall gross orders during 3Q and as high as 50% in some markets."
Jay McCanless, a housing analyst with FTN Securities, also noted that the company's so-called partially completed spec strategy, where unsold homes are started but stopped at the drywall stage of construction, was not only responsible for the company's 52% year-over-year spike in sales during the third quarter but also likely to provide additional new order benefit going forward. He wrote:
"We believe the substantial order gains in 3Q were the result of the drywall spec strategy and the lower-priced homes MDC began featuring at the beginning of 2009. Last quarter, MDC indicated an increasing percentage of home buyers need a finished or near-finished home because appraisal and mortgage financing hurdles have made closings less certain since May 1. We believe these issues still persist and lend even more credence to MDC's drywall spec strategy."