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M/I Homes: Common Share Price Perplexing

by: A.M. Steinbeck October 02, 2008 | about stocks: MHO    

A.M. Steinbeck

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While the credit storm batters the worldwide markets, M/I Homes' common shares (MHO) have been a floating fortress.  An island of strength in a sea of uncertainty.  What makes this situation more bizarre is their sinking cash position.  As of their June filing, their cash on hand was $2M while long term debt stood at $274M. 

Year to date, the common is up 115%; while the preferred (MHO-A) is essentially flat and trading at about one-half its redemption value.  Their bonds (55305BAC5) are also trading at a 20% discount to par and 13% lower than their first print in January.  

They’ve suspended dividend payments on both the preferred and the common due to noncompliance on their senior debt covenants.  Two months ago, the company filed for an additional dilution of $250M (via common, preferred and warrants).  To date, they haven’t been able to find any buyers for the new paper.  Their chairman and CEO, R. Shottenstein, sold $1.25M worth of shares since May.  With the majority of those shares trading 30% below today’s price.  

Liquidation value seems murky, but it appears as if there’s little or no worth attributable to the common upon dissolution.  Back of the envelope calculations are as follows: 

Payables are $30M more than Receivables.  Secured Bond Holders are owed $274M.  Other liabilities sit at about $50M.   And of course, the pref-A share holders are owed $96M.  We’ll ignore completion bonds and LoCs for the time being.  As stated earlier, they’ve got $2M in cash.  Property, Plant & Equipment combined with Long Term Investments are on the books at about $100M.  They have $90M tied up in 580 spec homes.  They value their 4,185 finished lots at $229M, but a little additional work shows us that even if they were to sell all those lots next quarter, with a finished house and no warranty liability or SG&A – they would only free up $180M (4,185 homes * selling price of $289,000 * 15% margin).  Also, they value their 7,115 remaining raw and unfinished lots at about $167M.  That’s dubious and probably overstated threefold in today’s housing market.  And they have 880 homes in their backlog, which is worth about $38M in profit (again assuming no warranty or SG&A). 

Add it up…and there’s about $15M distributable to the common…or about $1 per share.  With $100M in completion guarantees and LoCs, the smart money guess is that the attorneys would eat through that fairly quickly. 

So what gives? Who’s buying the common and ignoring the preferred and bonds?  I don’t know and I don’t have the answer…yet.  But so long as I don’t have to carry their dividend, I can afford to wait it out.

Disclosure: The author is short shares of MHO

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This article has 4 comments:

  •  
    Oct 02 01:52 PM
    They can meet short term liquidity needs by selling houses, even if accounting wise they are losing money on them
    Reply
  •  
    Oct 02 04:57 PM
    Forest is correct. Houses sold will reduce debt. I had a few shares of MHO left from years ago, and sold them yesterday, but the analysis mixes apples and oranges and is so bad, I have to question Seeking Alpha giving voice to it.
    Reply
  •  
    Oct 02 05:42 PM
    With a name like algo, I would expect a better understanding of the math involved. I didn't mix apples and oranges. I dismissed the income/expense and cash flow portion as irrelevant to my argument.

    The statement that they could sell houses to reduce debt infers that they're not trying to sell houses now. Because, from what I’m seeing, they’re depleting their cash reserve by $25M per quarter.

    Additionally, the $289,000 average sales price does not just "go to reduce debt" - first they have to pay for the materials and labor and then after the 15% gross margin - the $30M a quarter in SG&A.

    I didn't claim they had a cash flow problem - although they've burned through the $100M in cash they raised from the pref-A, over the past year, and don't seem to able to raise more. If payables get large enough, and they can't sell houses fast enough, they could get forced into bankruptcy by suppliers (the same way Kara Homes was). But that wasn't my argument. My question was or should I say, the puzzle is, the pref-A and the bonds trading off by degrees of magnitude while the common rallies.
    Reply
  •  
    Oct 03 12:55 PM
    I saw these problems some time ago, but held off selling my shares because the chart looked strong. But now that the cash position is so close to the line, I recently sold the shares. Makes you wonder who is doing the buying.
    Reply
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