– By GF Value
The stock of M.D.C. Holdings (NYSE:MDC, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $60.295 per share and the market cap of $4.2 billion, M.D.C. Holdings stock appears to be significantly overvalued. GF Value for M.D.C. Holdings is shown in the chart below.
Because M.D.C. Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 12.4% over the past five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. M.D.C. Holdings has a cash-to-debt ratio of 0.38, which is in the middle range of the companies in Homebuilding & Construction industry. GuruFocus ranks the overall financial strength of M.D.C. Holdings at 5 out of 10, which indicates that the financial strength of M.D.C. Holdings is fair. This is the debt and cash of M.D.C. Holdings over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. M.D.C. Holdings has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $3.9 billion and earnings of $5.301 a share. Its operating margin is 11.86%, which ranks better than 67% of the companies in Homebuilding & Construction industry. Overall, GuruFocus ranks the profitability of M.D.C. Holdings at 7 out of 10, which indicates fair profitability. This is the revenue and net income of M.D.C. Holdings over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of M.D.C. Holdings is 12.4%, which ranks better than 73% of the companies in Homebuilding & Construction industry. The 3-year average EBITDA growth rate is 25.1%, which ranks better than 77% of the companies in Homebuilding & Construction industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, M.D.C. Holdings’s return on invested capital is 13.24, and its cost of capital is 7.85. The historical ROIC vs WACC comparison of M.D.C. Holdings is shown below:
Overall, M.D.C. Holdings (NYSE:MDC, 30-year Financials) stock gives every indication of being significantly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks better than 77% of the companies in Homebuilding & Construction industry. To learn more about M.D.C. Holdings stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.