Sunday, October 21, 2007

MDC Holdings (MDC)

Nice long term chart huh? It seems to make sense to use a simple ABC target for this stock, like I did with DSL (very nice), because the last two waves were almost identical on a percentage basis. If MDC completes the C leg down it will touch $26.77. If we use the size of the recent triangle we get a target of roughly $17.50. Any way you slice it, a break of $38.50 on volume suggests a $10+ move to the downside.

How can a chart look so bearish? From yahoo:

"M.D.C. Holdings, Inc., through its subsidiaries, engages in building and financing homes in the United States. The company has two segments, Homebuilding, and Financial Services and Other. The Homebuilding segment builds and sells homes under the name Richmond American Homes in certain markets of the United States, including Arizona, California, Colorado, Delaware Valley, Florida, Illinois, Maryland, Nevada, Texas, Utah, and Virginia."

Yikes, these guys have been disappointing wall street analysts for years and their next report is on Wednesday Oct. 24th.

If you have been reading this blog then you know about how bad it is out there right now in the housing sector and it turns out these guys do business in the worst possible locations (in bold). We haven't seen a major homebuilder go bankrupt yet, but it can't be too far off. And when homebuilders start going under stocks like MDC will get cut in half over night. Or if they are the one going bankrupt I guess it would be more than half that gets cut.

Disclosure: I own MDC puts


indigo-alien said...

You didn't even comment on the balance sheet. There is an "asset" item there called "Deferred Long Term Asset Charges" and as of Q2 has more than tripled from the prior year.

In fact, the $230 million balance in deferred charges is more than the impairment charge that MDC actually recognized in Q2, and we know that things have gotten worse since then.

If MDC makes an accurate assessment of their property values they could be forced to write down $400 million to $500 million in assets, or 20-25% of equity. The resulting equity number would almost certainly trigger a review of covenants by their own lenders as the debt/equity number would rise to above 1.

Anonymous said...

We haven't seen a major homebuilder go bankrupt yet,...

It is only a matter of time, IMO.

And I hope you are right about MDC.

Disclosure: I am short MDC.


pythagoruz said...

Excellent point indigo. In fact some homebuilders are having serious problems with their lenders right now:

It is worth noting all the cash ($670M) they have on hand but one wonders how long they can hold onto it as they continue to pay their $45M/yr (ttm) dividend and lose $160M/yr (ttm) on operations. I think it must be the reason why MDC has outperformed. Compare the MDC chart to KBH, LEN, TOL or any other homebuilder and you will be very surprised. It makes me feel like we not late to the party.

Eh, any day now.