May 21, 2021
[7 min Read]
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.
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.
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%.
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.
In a SEC Filing M/I Homes stated that their effective interest rate is 23.2%.
Investment Plan and Valuation:
In order to value M/I homes I conducted both a DCF model and a comparable analysis.
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.
In order to further value and validate $MHO, I decided to undergo EV/EBITDA, EV/Revenue, and P/E comparables.
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.
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.
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%.
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.