MDC and Residential Construction industry

**superbowl** Sun Jan 08, 2006 3:45 pm

MDC and Residential Construction industry
Hi Blast, What is your opinion on stocks of the Residential Construction industry? I know that there are not many positive factors around, while when do you think the sector will hit the bottom and be ready for a rebound (back to normal) ? I checked MDC and I believe the financial status is pretty healthy. My opinion, the earning of the company of 2006 wouldn't be great, but given the fact that it has a book value around $40, can I conclude thestocks is under-valued and is a good candidate for long-term holding? I had similar point on MHO. Its capital structure is not as healthy as MDC, but the book value seems to be even more attractive.

I appreciate your opinion. thanks.

**blast_investor** Sun Jan 08, 2006 4:04 pm

Hi superbowl,

I am not very big fan of residential construction stocks such as MDC. These stocks are interest rate sensitive stocks. Their earning is very cyclical and largely depends on interest rate.

On the other hand, there have been lots of talk of housing bubble and I do not buy that. I do not see overall US housing price to collapse soon. I see US real estate price including residential market to be stable and overall bullish upward in the future.

However, construction business is not really related to housing price. The profit from construction is mainly from 2 sources, the number of houses sold and the profit margin on each house sold. Right now, the material price inflation is higher than house price appreciation rate, that will put some pressure on profit margin. But the main problem is the interest rate. The rate has been rising and I see it will continue for the future. That will put lots of buyers into rental market and new housing sale will slow down.

Actually, there were already some housing slowdown news hitting the market, affecting stocks like RYL.

I would avoid construction stocks. Maybe housing price may never collapse in next several years, but housing construction stock earning can collapse. It is very difficult to catch top or bottom of construction cycles but history has proven that housing construction business is very cyclical and risky business. The fed is raising rates and I do not feel comfortable in housing construction stocks at this valuation.

MDC has PE of 6.55, that is cheaper than its peers. Many of its peers trade at PE = 8 to 9. But the valuation gap does not mean long term bullish case for MDC. The stock price of MDC peers could drop as well to remove the valuation gap. Therefore, I would avoid construction stocks across the board, including MDC in order to avoid the risk.