This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines focus on the housing sector, as one analysts shifts its stance on three big names in homebuilding — downgrading both PulteGroup, Inc. (NYSE:PHM) and The Ryland Group, Inc. (NYSE:RYL), but…
Upping M.D.C. Holdings, Inc. (NYSE:MDC) to buy
Before moving on to the bad news, let’s start with some good. Investment banker KeyBanc Capital Markets thinks that in view of the broad strength in housing stocks lately, it’s time to revisit the sector, take some winnings off the table, and move a bit of that money into stocks with perhaps a bit more potential to keep growing. It’s choice today: M.D.C. Holdings, Inc. (NYSE:MDC).
According to KeyBanc, MDC’s numbers are showing improvement, yet the stock continues to trade at a discount relative to its peers in the housing sector. And in a sense, KeyBanc is right about that. Due to weakness among some players in the industry, M.D.C. Holdings, Inc. (NYSE:MDC)’s numbers are lower than the average in many respects. For example, Yahoo! Finance has the average price-to-sales ratio in this industry at 5.4… but MDC’s P/S ratio is only 1.4. The average P/E (hurt by unprofitable players, no doubt), is in the quadruple digits, yet MDC costs “only” 24 times earnings.
It’s that “only” that worries me, though, because 24 times earnings isn’t something you’d ordinarily call a bargain price — especially not with M.D.C. Holdings, Inc. (NYSE:MDC)’s record of having burnt cash (negative free cash flow) for the past three years straight, which suggests MDC’s GAAP “earnings” are of pretty poor quality. So while it’s true the stock could be the bargain that KeyBanc makes it out to be — what with the projected earnings growth rate being 50% and all — I personally remain unconvinced.
Punishing Pulte… unfairly?
Fact is, I’m not even convinced that M.D.C. Holdings, Inc. (NYSE:MDC) is selling at the “discount” that KeyBanc says it is. Why not? Well, let’s take a look at one of the peers KeyBanc thinks MDC is undervalued-in-comparison-to: PulteGroup.
Priced at 30 times earnings, PulteGroup, Inc. (NYSE:PHM) sells at a premium to MDC, despite having a similarly pie-in-the-sky rate of projected earnings growth — 34%. That’s probably one reason the analyst downgraded PulteGroup, Inc. (NYSE:PHM) to hold, while promoting M.D.C. Holdings, Inc. (NYSE:MDC) to buy.