Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

MDC Holdings (MDC) 2012 Second Quarter Results: A Sharp Profit Turnaround

|Includes: M.D.C. Holdings, Inc. (MDC)

MDC Holdings (NYSE:MDC) reported second quarter net income of $10.6 million or $0.22 per share, compared with a loss last year of $28.0 million or $0.60 per share. The average estimate of analysts was $0.06 per share.

Homebuilding revenues increased 23.8% to $258.4 million. New home deliveries rose 21.4% to 861 units; while the average selling price increased 2.4% to $297,900. Land sales for the quarter were modest at $1.8 million, down from $2.6 million.






New Orders

$ Backlog

$0.22 vs. ($0.60)

up 23.8%

14.2%, up 530 bp

up 21.4%

up 2.4%

up 31.8%

up 51.7%

Gross margin improved 530 basis points to 14.2%. The company booked no impairments during the quarter, compared with $8.6 million last year. Management attributed the balance of the improvement in gross margins to delivering a significantly higher percentage of homes that were under contract (rather than speculative sales) and also to a meaningful reduction in incentives.

The company's SG&A expense ratio declined 850 basis points to 14.3% due to cost reduction efforts, lower staffing levels and a $3.8 million recovery in legal expenses.

Net new orders increased 31.8% to 1,402 units, due to higher absorption levels and a sharp reduction in the cancellation rate. The company closed the quarter with a dollar backlog up 51.7% compared with last year.

The stock was mostly unchanged on the announcement, but it is up 90% year-to-date. Thus, much of the improvement in earnings was already baked into the stock price.

Consensus estimates anticipate third quarter earnings of $0.15 per share, compared with a loss of $0.68 last year and revenues of $314.2 million, up 48.6%. The revenue number looks a little aggressive, when compared against the company's recent quarterly backlog conversion ratio, but the earnings projection ought to be quite conservative, given the earnings and profit margins reported this quarter.

Analysts anticipate full year earnings of $0.49 per share on revenues of $1.12 billion. In 2013, the consensus projects $1.00 in EPS on $1.39 billion of revenues. Here again, assuming that the second quarter performance is carried through the rest of the year, earnings projections for 2012 are too low. In all likelihood, the 2012 earnings should be closer to $1.00.

Management said that the improvement this quarter is mostly the result of the successful implementation of several key strategic initiatives, combined with modest improvement in overall housing market conditions. It believes that the company is positioned to achieve continued gains in operating leverage in the 2012 second half, which will allow it to reach its goal of a profitable 2012.

Whether MDC gets to $1.00 in EPS in 2012 and then realizes further improvement in 2013 will depend to a great extent on the macroeconomic environment. If overall economic growth softens and the job growth moderate further, then the recent sharp increases in sales and earnings reported by the homebuilders in Q2 will prove to be fleeting. On the other hand, the recent lift in new home sales should help to revive the economy. The new homes market is just now coming off of a historic low and projected net profit margins for builders for 2012 and 2013 are only a fraction of what they were a decade ago. So unless the economy goes to hell in a hand basket, homebuilder stocks still have significant upside potential, even after gains that are averaging more than 55% year-to-date and more than 100% since the October 2011 lows.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.