Homebuilders, everyone hates them. We've heard all the horror stories about where they traded in the early 90s and why all of them are apparently going bankrupt. To hear the stories you'd think that no one will ever buy a new home again!

While the income statements of every homebuilder has declined there is one homebuilder who has been doing some marvelous things with that ignored little financial statement. The balance sheet.

When shorts talk about MDC, the response to why they are short is pretty basic. They think the industry is horrible and MDC is part of the industry so therefore it must be horrible too. First I'd like to mention that I am a bottom up investor, which means that I look at the company first, and the industry conditions second. It’s pretty clear to me that MDC is the best positioned of all the homebuilders it’s most certainly not the weakest or the highest valued. Even if you were bearish on the industry, a better trade would be to short HBX while going long MDC.

The reason MDC is better positioned than its peers, is quite simple. They have less land and inventory on the books. A few years ago as housing prices really started to climb, many homebuilders bought up as much land as they possibly could and used their cash reserves and piled up debt to pay for it. MDC chose not to do this and as a result has strengthened their balance sheet. Eventually, MDCs competitors will be forced to sell their land and maybe their inventory for pennies on the dollar to pay interest charges and maintain liquidity. When they do, MDC is likely to snap up that land on the cheap.

Morningstar had a good article recently showing why MDC is better positioned to weather a housing downturn. They concluded that MDC was better positioned to weather a downturn than any homebuilder other than maybe NVR which doesn’t develop land. To further illustrate the point you need to look at two items on homebuilder’s balance sheet. During a crisis a homebuilder is hopefully reducing inventory and building up cash. MDC is one of the few homebuilders doing both.

Inventory rise %06

RYL +33%

PHM +13%

DHI +34%

BZH +22%

TOA +33%

LEN 0%

CTX +28%

TOL +1%

HOV +33%

SPF -1%

KBH 7%

MDC -20%

The net cash position tells the same story while, many of MDCs competitors borrowed to increase their cash reserves in 06, MDC actually increased its liquidity.

Cash Position change less debt 06

RYL -40%

PHM -16%

DHI -27%

BZH -82%

TOA -21%

LEN -4%

CTX -5%

TOL -45%

HOV -50%

SPF -31%

KBH -9%

MDC 83%+++

Yes that's right, MDC is the ONLY major homebuilder that increased their net cash position in 06 and not only did they do so, but they did so with avengence MDC has much less debt than many of their larger competitors who’s balance sheets are deteriorating. Perhaps that's why noted value investors such as David Einhorn and Monish Pabrai have substantial positions

That's enough rambling for me. Later I'll talk about the homebuilding industry in general and why things may not be as bad as the press would lead you to believe.