On Friday, M.D.C. Holdings will report earnings for its fourth quarter before the market opens, marking the unofficial end to earnings season for the bulk of the public home builders. Wall Street analysts expect a loss of $0.14 per share.
Management will host an earnings call at 12:30 p.m. Eastern on Friday, during which analysts will likely be looking for additional color on a number of issues, most notably community counts, overhead, and margins. Given the company's aggressive land spend over the past 18 months, analysts are anxious to see M.D.C. have a meaningful uptick in the number of actively selling communities, which should positively affect sales. Moreover, additional storefronts also would help the company better leverage its infrastructure and overhead; last quarter, SG&A came in at 25.1% of revenues. Analysts also would like to see additional overhead reduction and cost cuts so the company could improve its gross margins, which last quarter took a tumble from the previous quarter.
In a research note published Thursday, Stephen East with Ticonderoga Securities wrote:
"This quarter may well turn out to be the first quarter of MDC's evolution, as we expect the strong land purchase program of the last year translates into meaningful community growth. Unfortunately, we also believe the home building operations cost side will not show enough reduction to make the added community growth attractive. ... Net, we still see virtually no realistic results scenario that would make MDC's operating margin any better than second worst in the group (PHM currently holds the distinction of worst)."
But analysts' focus on community count growth is hardly just an M.D.C. issue. It has emerged as a key theme during nearly every public builder's earnings call. New communities?and more of them?represent an opportunity for better volume, absorptions, and margins and can serve as a leading indicator of sorts for when a company may return to profitability, if not already there. Consequently, most analysts have been keen to understand how quickly the public builders are closing out of less profitable legacy communities and transitioning to a higher mix of these new communities.
With the spring selling season officially kicking off last weekend, analysts also have been interested in getting an early read on traffic trends through January. Builders have consistently indicated that they've seen a very favorable jump in traffic trends from December to January, giving hope that the spring selling season will prove to be more fruitful than the back half of 2010, when sales volumes took a nosedive following the expiration of the federal home buyer tax credit.
Analysts are also keeping a close watch on what's happening in the wild world of mortgage underwriting. Several builders saw a creep up in cancellation rates as tighter lending standards essentially took buyers out of the pool midstream.
Part of analysts' heavy focus on new orders is due to the fact that builders' backlogs are down across the board?and significantly in many cases. Some of the builders taking the biggest lumps in terms of units in backlog include KB Home, whose backlog was down 37% year over year; Pulte Group, which experienced a slide of 32.8%, Ryland Group, which saw backlog fall 31.5%; and Standard Pacific Homes, which logged a 30.9% drop in backlog. For many public builders aiming to deliver on their promises of being profitable for the whole of 2011, restocking backlog through the first and second quarters of the year is critical.