MDC Holdings ( MDC) is beginning to stand out as one of the more attractive homebuilder stocks. JMP Securities analyst Alex Barron upgraded the company to market outperform Monday, citing the company's conservative business model and short-term land supply. His previous rating was market underperform. Last week, the company reported fourth-quarter results that came in worse than expectations, with large land impairment charges resulting in a loss of 14 cents a share. Builders take write-off and writedown charges related to high-priced land deals that are no longer profitable. But MDC's attractiveness lies in its shortened land supply, which will allow the company's earnings to bottom sooner than those of other builders, Barron wrote in his note. The company has a 2.4-year supply of owned land and one year of optioned land, the analyst noted. The average homebuilder is carrying a four- to five-year supply of owned land and another four to five years of optioned land. In the short run, MDC's results will continue to be messy as the company takes impairment charges and works down its land inventory at the expense of margins. "MDC's short land position allows it to quickly reduce its exposure to a bad market, or if need be, exit that market until market conditions warrant reinvestment," Barron said.
This very issue was highlighted by a hedge fund investor last week after MDC reported earnings. The investor, who is generally bearish on the builders, noted that MDC is the only homebuilder that managed to decrease the dollar value of its inventory on its balance sheet from a year earlier. As the theory goes, the clearing of inventory generates strong free cash flow for the company, and MDC's strong balance sheet positions it to take advantage of any attractive land deals that appear in the market. Thus, MDC's margins could very well recover faster than the rest of the group, since it will be building on cheaper-priced land. "Based on our analysis, we believe MDC is much closer to the bottom than its peers," Barron noted. MDC shares rose 1.6% to $57.57 in recent trading.