How Macro Trends have helped $MHO, and how they will continue to help!

Valuation: Undervalued Investment Thesis: Many people think that this red-hot real estate market is too good to be true, and that we are in a “bubble” that is set to burst and send us all back to the stone age. However, with the high levels of savings due to the pandemic, and the low interest rates on mortgages, more people are able to afford real estate now, then let us say 2 years ago. Professionals say that there is no end to this madness in the near future. This presents a rare opportunity for construction companies, namely residential construction companies such as $MHO. We have already seen the effect that this phenomenon has caused on their balance sheet with their revenues up 21.8% YoY, their interest expense cut in half, and their margins increasing. According to my analyses (DCF and comparable), there is an implied upside to this investment of 59.53%, which translates into a share price of $108.27 (currently $67.87). Company Overview: M/I Homes is one of the leading builders of single-family homes in the USA, and since their inception in 1973 they have constructed over 118,000 homes. M/I’s operations consist of building homes, as well as financial services (providing mortgage loans to the customers of their homebuilding operations. 98% of M/I’s revenue comes from the homebuilding segment of their company. This segment consists of the designing, marketing, constructing, and selling of single-family homes and attached townhomes to their customers. Furthermore, some of M/I’s revenue is generated through the selling of land plots. M/I own 225 different communities (which is a single development with multiple homes) in 10 different states across the USA. M/I focus on high levels of design, strong construction quality, excellent customer service, and financing options in order to differentiate themselves from the other homebuilders in the USA. M/I’s financial service operations generate revenue primarily from selling mortgages and collecting fees for both closing and insurance services. This segment of M/I’s business accounts for the other 2% of their annual revenues. Investment Information: Macro Overview: During the pandemic, the American savings rate soared to a high of 32.2% in April 2020. With all of this extra cash and the current low interest rates, many people have been looking to use these additional savings to invest into real estate. Additionally, the real estate market is currently experiencing a supply shortage, which is not expected to be subside any time soon. Since there is such a large demand for real estate, and a shortage of supply, prices are getting pushed to record high’s, with no immediate end in sight. These high prices can be very beneficial for companies like M/I homes as they are able to sell their current builds for ridiculously high prices. There are 2 sides to this coming for residential construction companies like M/I and their competitors. On one side, the interest rates are down, which will hurt the financial segments of their businesses, however on the other side they will be enjoying higher margins and higher sale prices of these homes. For M/I this is very beneficial because 98% of revenue comes from selling their homes, and the other 2% is from their financial segment. Having a dramatic increase for 98% of their revenue, while suffering a decrease only on the other 2% of their revenue is a deal M/I homes would never turn down. Sources: https://time.com/nextadvisor/banking/savings/us-saving-rate-soaring/ https://www.forbes.com/advisor/mortgages/new-home-construction-forecast/ Company Information: M/I’s new contracts increased by 16% YoY to 6,773 contracts Record high for M/I. In 2020 M/I delivered 6,926 homes to their customers (up 9% YoY) Record High Total sales (including their backlog) increased by 18% YoY to $1.06B EBIT increased by 18% YoY M/I has set out several strategic business objectives moving forward Grow their presence in existing markets Expanding the availability of their Smart Series homes Expanding into new markets that show promise Maintaining a strong balance sheet and remaining financially healthy. M/I’s credit rating is BB- according to Fitch Fitch noted that their business is not very diversified by region and that their business is very cyclical, however they do have a good liquidity position. This was of May 2020, and their business has been booming since, so I am looking for a re-rating to provide more context about the current situation. M/I’s gross margin on their financial services segment is 100%. Gross margins on the Southern and Northern homebuilding are 17.72% and 17.8% respectively. Their geographical market is split into 2 different segments. Northern Illinois Chicago Ohio Columbus, and Cincinnati Indiana Indianapolis Minnesota Minneapolis Michigan Detroit Southern Florida Orlando, Sarasota, and Tampa Texas Austin, Dallas/Fort Worth, and San Antonio North Carolina Charlotte, and Raleigh Valuation Information: WACC: I was able to find M/I Home’s WACC through a website called Discoverci.com, in which they estimated M/I homes WACC to be 10.63%. CAGR: I was able to locate the CAGR in one of M/I Home’s SEC filings in which they stated a growth rate of 18%. Interest Expense Growth Rate: In order to arrive at this figure, I found the growth rate between 2011-2019, which turned out to be 4.53%. The reason why I did not include 2020 is because it was an anomaly, from 2011-2019 the interest expense grew consistently but due to the decreased interest rates, their interest expense was cut in half in 2020. I ten apply this percentage increase to their 2020 interest expense and forecasted it over the following 10 years. Tax Rate: In a SEC Filing M/I Homes stated that their effective interest rate is 23.2%. Investment Plan and Valuation: Valuation: In order to value M/I homes I conducted both a DCF model and a comparable analysis. DCF: In order to arrive at a valuation for M/I Homes through a DCF model I used the information found in the “valuation information” section of this report. By doing this, I found an implied upside of 67.33%, which would translate into a share price of $111.80. In order to further prove this valuation I underwent a comparable analysis. Comparable Analysis: In order to further value and validate $MHO, I decided to undergo EV/EBITDA, EV/Revenue, and P/E comparables. EV/EBITDA: I compared this multiple as it is a standard way of valuing companies in the financial industry. This comparable implies an upside of 60.62% or a price of $107.28. EV/Revenue: I compared this multiple as once again it is standard practice. This comparable implies an upside of 75.13% or a share price of $116.97. P/E: I compared this multiple because it factors in depreciation and amortization into the valuation. By conducting this comparable I arrived at an implied upside of 42.82%. As you can probably notice, all of these comparable are roughly in the same ballpark, which gives me more conviction when investing in such a company. Additionally, these prices are also relatively close to the valuation that I arrived at through the DCF model, which is yet another factor in confirming my valuation. Overall, the average price from all of the comparable came out to be $106.55, which implies an upside of 59.53%. Plan: I see any entrance into a position below $80/share as a good buy, as it still leaves room for a large enough upside to make the investment worth it, however the stock is currently trading for $67.87, which is an absolute steal. I would hold this investment until it reaches the $108.27 price target (the average of the comp’s), and at this point I would look to exit the position. By following this plan, an investment in $MHO would yield a 59.53% gain, which is well worth it. Catalysts: FED keeping interest rates low If the FED maintains the interest rates at their current yield, more people will be able to afford homes, which will help drive business for companies like M/I Homes. Earnings Report $MHO is set to release their next earnings report sometime during June, with the current trends in the housing and construction markets, it would not surprise me if $MHO was able to beat earnings, which would help the stock price drastically. Credit Rating Increase M/I Homes current credit rating is BB-, which is not favourable, however they should be reporting stronger earnings and better margins, which might help their financial health and lead to a credit rating increase somewhere down the line. This will draw more investors into positions in this stock because there is less perceived risk. Risks: FED Increasing the interest rates If the FED is forced to increase interest rates, then less people will be able to afford houses and their mortgages, which will slow down M/I Homes growth, which is not a good thing to see as an investor. Negative outlooks/results in future real estate and home sales reports. This could give off a poor sentiment to investing in residential construction stocks (like $MHO) and spook investors out of their positions. There is one coming out today (May 21, 2021) at 10 AM (EST), and it will be interesting to see what they have to say. Portfolio Reasoning: Helps to diversify the small cap portfolio to mitigate much of the risk involved with small cap stocks. Wildly undervalued with a lot of room to grow. I essentially get to pay $0.63 for a $1 of value. Aligns with the core principals of my portfolio Small cap Undervalued Current Macro trends are favourable.

back
default-avatar-6

UndervaluedSmallCaps

May 21, 2021

-7.07%

Change % Since Posting

66.72

Price When Posted

-4.71

Change Since Posting

MHO

MI Homes Inc.

62.01

0.00
0.00%
Current Price

How Macro Trends have helped $MHO, and how they will continue to help!

bullish

Valuation: Undervalued

Investment Thesis:

  • Many people think that this red-hot real estate market is too good to be true, and that we are in a “bubble” that is set to burst and send us all back to the stone age. However, with the high levels of savings due to the pandemic, and the low interest rates on mortgages, more people are able to afford real estate now, then let us say 2 years ago.
    • Professionals say that there is no end to this madness in the near future.
  • This presents a rare opportunity for construction companies, namely residential construction companies such as $MHO.
    • We have already seen the effect that this phenomenon has caused on their balance sheet with their revenues up 21.8% YoY, their interest expense cut in half, and their margins increasing.
  • According to my analyses (DCF and comparable), there is an implied upside to this investment of 59.53%, which translates into a share price of $108.27 (currently $67.87).

Company Overview:

M/I Homes is one of the leading builders of single-family homes in the USA, and since their inception in 1973 they have constructed over 118,000 homes. M/I’s operations consist of building homes, as well as financial services (providing mortgage loans to the customers of their homebuilding operations.

98% of M/I’s revenue comes from the homebuilding segment of their company. This segment consists of the designing, marketing, constructing, and selling of single-family homes and attached townhomes to their customers. Furthermore, some of M/I’s revenue is generated through the selling of land plots.

M/I own 225 different communities (which is a single development with multiple homes) in 10 different states across the USA. M/I focus on high levels of design, strong construction quality, excellent customer service, and financing options in order to differentiate themselves from the other homebuilders in the USA.

M/I’s financial service operations generate revenue primarily from selling mortgages and collecting fees for both closing and insurance services. This segment of M/I’s business accounts for the other 2% of their annual revenues.

Investment Information:

Macro Overview:

During the pandemic, the American savings rate soared to a high of 32.2% in April 2020. With all of this extra cash and the current low interest rates, many people have been looking to use these additional savings to invest into real estate. Additionally, the real estate market is currently experiencing a supply shortage, which is not expected to be subside any time soon. Since there is such a large demand for real estate, and a shortage of supply, prices are getting pushed to record high’s, with no immediate end in sight.

These high prices can be very beneficial for companies like M/I homes as they are able to sell their current builds for ridiculously high prices. There are 2 sides to this coming for residential construction companies like M/I and their competitors. On one side, the interest rates are down, which will hurt the financial segments of their businesses, however on the other side they will be enjoying higher margins and higher sale prices of these homes.

For M/I this is very beneficial because 98% of revenue comes from selling their homes, and the other 2% is from their financial segment. Having a dramatic increase for 98% of their revenue, while suffering a decrease only on the other 2% of their revenue is a deal M/I homes would never turn down.

Sources:

https://time.com/nextadvisor/banking/savings/us-saving-rate-soaring/

https://www.forbes.com/advisor/mortgages/new-home-construction-forecast/

Company Information:

  • M/I’s new contracts increased by 16% YoY to 6,773 contracts
    • Record high for M/I.
  • In 2020 M/I delivered 6,926 homes to their customers (up 9% YoY)
    • Record High
  • Total sales (including their backlog) increased by 18% YoY to $1.06B
  • EBIT increased by 18% YoY
  • M/I has set out several strategic business objectives moving forward
    • Grow their presence in existing markets
    • Expanding the availability of their Smart Series homes
    • Expanding into new markets that show promise
    • Maintaining a strong balance sheet and remaining financially healthy.
  • M/I’s credit rating is BB- according to Fitch
    • Fitch noted that their business is not very diversified by region and that their business is very cyclical, however they do have a good liquidity position.
    • This was of May 2020, and their business has been booming since, so I am looking for a re-rating to provide more context about the current situation.
  • M/I’s gross margin on their financial services segment is 100%.
    • Gross margins on the Southern and Northern homebuilding are 17.72% and 17.8% respectively.
  • Their geographical market is split into 2 different segments.
    • Northern
      • Illinois
        • Chicago
      • Ohio
        • Columbus, and Cincinnati
      • Indiana
        • Indianapolis
      • Minnesota
        • Minneapolis
      • Michigan
        • Detroit
      • Southern
        • Florida
          • Orlando, Sarasota, and Tampa
        • Texas
          • Austin, Dallas/Fort Worth, and San Antonio
        • North Carolina
          • Charlotte, and Raleigh

Valuation Information:

WACC:

I was able to find M/I Home’s WACC through a website called Discoverci.com, in which they estimated M/I homes WACC to be 10.63%.

CAGR:

I was able to locate the CAGR in one of M/I Home’s SEC filings in which they stated a growth rate of 18%.

Interest Expense Growth Rate:

In order to arrive at this figure, I found the growth rate between 2011-2019, which turned out to be 4.53%. The reason why I did not include 2020 is because it was an anomaly, from 2011-2019 the interest expense grew consistently but due to the decreased interest rates, their interest expense was cut in half in 2020.

I ten apply this percentage increase to their 2020 interest expense and forecasted it over the following 10 years.

Tax Rate:

In a SEC Filing M/I Homes stated that their effective interest rate is 23.2%.

Investment Plan and Valuation:

Valuation:

In order to value M/I homes I conducted both a DCF model and a comparable analysis.

DCF:

In order to arrive at a valuation for M/I Homes through a DCF model I used the information found in the “valuation information” section of this report. By doing this, I found an implied upside of 67.33%, which would translate into a share price of $111.80. In order to further prove this valuation I underwent a comparable analysis.

Comparable Analysis:

In order to further value and validate $MHO, I decided to undergo EV/EBITDA, EV/Revenue, and P/E comparables.

EV/EBITDA:

I compared this multiple as it is a standard way of valuing companies in the financial industry. This comparable implies an upside of 60.62% or a price of $107.28.

EV/Revenue:

I compared this multiple as once again it is standard practice. This comparable implies an upside of 75.13% or a share price of $116.97.

P/E:

I compared this multiple because it factors in depreciation and amortization into the valuation. By conducting this comparable I arrived at an implied upside of 42.82%.

As you can probably notice, all of these comparable are roughly in the same ballpark, which gives me more conviction when investing in such a company. Additionally, these prices are also relatively close to the valuation that I arrived at through the DCF model, which is yet another factor in confirming my valuation. Overall, the average price from all of the comparable came out to be $106.55, which implies an upside of 59.53%.

Plan:

I see any entrance into a position below $80/share as a good buy, as it still leaves room for a large enough upside to make the investment worth it, however the stock is currently trading for $67.87, which is an absolute steal.

I would hold this investment until it reaches the $108.27 price target (the average of the comp’s), and at this point I would look to exit the position. By following this plan, an investment in $MHO would yield a 59.53% gain, which is well worth it.

Catalysts:

  • FED keeping interest rates low
    • If the FED maintains the interest rates at their current yield, more people will be able to afford homes, which will help drive business for companies like M/I Homes.
  • Earnings Report
    • $MHO is set to release their next earnings report sometime during June, with the current trends in the housing and construction markets, it would not surprise me if $MHO was able to beat earnings, which would help the stock price drastically.
  • Credit Rating Increase
    • M/I Homes current credit rating is BB-, which is not favourable, however they should be reporting stronger earnings and better margins, which might help their financial health and lead to a credit rating increase somewhere down the line.
      • This will draw more investors into positions in this stock because there is less perceived risk.

Risks:

  • FED Increasing the interest rates
    • If the FED is forced to increase interest rates, then less people will be able to afford houses and their mortgages, which will slow down M/I Homes growth, which is not a good thing to see as an investor.
  • Negative outlooks/results in future real estate and home sales reports.
    • This could give off a poor sentiment to investing in residential construction stocks (like $MHO) and spook investors out of their positions.
      • There is one coming out today (May 21, 2021) at 10 AM (EST), and it will be interesting to see what they have to say.

Portfolio Reasoning:

  • Helps to diversify the small cap portfolio to mitigate much of the risk involved with small cap stocks.
  • Wildly undervalued with a lot of room to grow.
    • I essentially get to pay $0.63 for a $1 of value.
  • Aligns with the core principals of my portfolio
    • Small cap
    • Undervalued
    • Current Macro trends are favourable.
update-select
update-select
update-select
update-select
Comments

Write your comment....

Sign in to comment

read-time
7 min

108.27

Target Price

9/ 10

Confidence

1-3 Years

Timeframe
catalyst icon
Earnings Release
catalyst icon
News
catalyst icon
SEC Filing
catalyst icon
Sentiment
catalyst icon
Other Catalyst

MHO Channel

Start new chat
next