Executives at M.D.C. Holdings are scheduled to release first-quarter results Tuesday before the market opens. Analysts are expecting an average loss of $0.44 per share, which is relatively flat against the company's loss of $0.45 per share a year ago.
Topping the company's to-do list during the quarter was further rein in its fixed costs in an effort to better leverage them against volume to the benefit of margins. Analysts would like to see more head count reductions similar to the 100-plus positions that were recently eliminated at Beazer Homes USA. However, for much of the downturn, M.D.C. management has been rather reluctant to keep trimming staff, preferring to run at a significantly higher SG&A level than most peers to keep staff in place for a recovery scenario. At the end of 4Q2010, M.D.C.'s SG&A as a percentage of revenues was 22%, considerably higher than a peer group average of roughly 17%.
However, real housing recovery has proved elusive, and consequently the company's infrastructure costs continue to be under the microscope. As Ticonderoga Securities' analyst Stephen East wrote in a research note following last quarter's call with executives:
"Let us put the SG&A load in perspective for investors; if MDC doubled sales and added zero incremental SG&A costs (an impossible feat), SG&A, as a percentage of sales, would be roughly equal to levels witnessed at the beginning of this century, before the housing boom. Infrastructure needs to be reduced, and we are convinced it will not impair future growth. We often hear the refrain that MDC is pretty streamlined, it's just a volume issue. When doubling or tripling sales is needed for normalized profitability, the organization's costs are too high. If infrastructure needs to be kept, eliminate other costs such as the corporate jet, reduce C-level pay so it is in line with revenues and peers (on a percentage of sales basis). One hundred employees eliminated is helpful, but other efforts could produce more."
While company management continued to work on its costs during the quarter, it also likely pulled hard on the volume lever, continuing to roll out new communities to boost volumes and margins. Last quarter, new communities accounted for 45% of closings and carried gross margins of roughly 400 basis points higher than legacy communities.
However, despite this push to increase its mix of new, more profitable communities, analysts last quarter were unimpressed with the company's overall adjusted gross margin of 13.8%, which was below peer average. For analysts, the margin underperformance not only further highlighted the company's bloated cost structure but also suggested that the company's margin potential could be limited.
Moreover, analysts will be paying close attention to the company's impairments for the quarter, particularly as a number of public builder peers recently saw an uptick in charges contribute to losses for their first quarters. Last quarter, M.D.C.'s impairments reached $18 million, well above many analysts' projections. More concerning was that roughly half of the impairments came from new communities, drawing attention to the company's underwriting. The concern being that its deal underwriting skill may not match its zeal for new communities.
In that vein, analysts during Tuesday's call will want more color on the company's April purchase of SDC Homes in Seattle. The deal gives the company a No. 3 seed in the high-priced Seattle market and represents an opportunity for the company to meaningfully grow volumes and revenues. Analysts will be trying to get a gauge on just how quickly the company's balance sheet could begin to see benefit from the purchase and whether the deal will offer enough volume to help the company offset its heavy cost structure.