Wednesday, May 2, 2012

Melcor Developments Inc 2

Posted blog entry on investing and withdrawals and how things worked out at comments blog.

I own this stock of Melcor Developments Inc. (TSX-MRD). I first bought this stock in 2008 and then bought some more in 2009. I have made a return of 12.4% per year on this stock. Of this return, 9.7% per year comes from capital gain and 2.7% per year comes from dividends. So, 21.5% of my return comes from dividends.

Over the past year there was insider trading. Some $1.8M of shares was bought late last year, mainly by directors and at or below $11.50. There was minor insider selling, but net insider buying is at $1.8M. Lately some insiders have retained shares gotten under options and some have not. Almost everyone has more shares than options. The CEO has some $20M of shares in this firm.

There is only 15 institutions that own some 7% of this firm. Over the past 3 months they have increased their shares by 15%. This is positive. The stocks in this company are heavily owned by the Melton family. Insiders own over 50% of the shares.

I get 5 year median low and high Price/Earnings Ratios of 5.23 and 14.87. This is rather a wide range. The current P/E of 8.27 based on stock price of $15.05 shows a rather low stock price.

I get a Graham Price of $28.57. The low and high difference between the Graham Price and the stock price is the stock price being 57% and 22% lower than the Graham Price. The stock price of $15.05 is some 47% lower than the Graham Price. This shows a good stock price.

However, the Graham Price has popped up lately because of the increase in the book value mainly due to new account rules. In 2010, the Graham Price was $19.90. If the Graham Price was still there, the stock price would only be 24% lower than the Graham price. So, maybe this test is compromised a bit.

I get a 10 year average Price/Book Value Ratio of 1.04. The current P/B Ratio is 0.75. Not only is the current ratio showing that the stock price is below the book value, the current ratio is only 73% of the 10 year value and shows a good stock price.

However, if the book value had not increased dramatically in 2011, this test might show a different story with the current P/B Ratio at or higher than the 10 year median value. So this test might be compromised. (By the way, the only site I know that gives current (or most recent quarter) P/B Ratio is Reuters. For this stock see the financials tab at Reuters.

The last test and probably the most important one is the dividend yield test. The current yield is 2.66%. The 5 year median is 2.92% some 9% higher. This would imply that the current price, while not unreasonable, is not cheap. Of course, there is also a problem with this test because dividends were cut significantly in 2009. The 10 year median dividend yield, of 2.69, is close to the current dividend yield. So, basically, we are back to a reasonable stock price for this stock.

There seems to be only one analyst following this stock. He gives a 12 stock price of $22 and rates the company a Buy.

There was one Analysis that I found at the Trading Chief, which is as follows below. This is dated March 26, 2012.

“The majority of Melcor's assets are in Alberta, with a growing inventory of residential units in the US. Management believes that the economic indicators in these regions provide a strong outlook for our business over the next several years. Alberta fundamentals remain strong, with low unemployment rates, net in-migration, higher than the national average weekly earnings, strong capital investment, stabilizing inflation and relative stability in the price of oil.

These fundamentals create a favorable environment for both residential and commercial property development. The US continues its slow economic recovery with lingering uncertainty and volatility, limited access to capital and continued distress in the speculative and investment real estate markets. These fundamentals create an environment that favors rentals over home ownership.

With Melcor's inventory of raw and developed land, financial resources and strong management group, the company is well positioned to take advantage of market opportunities.”

There is a short article on this company in the Edmonton Journal. And, another article in the same journal for March 17.

I will be holding on to the shares I have. This company provides a decent dividend yield of 2 to 3% and you should earn capital gains over the long term. This stock is riskier than a lot of dividend paying stocks, but probably will provide long term capital gains and long term growing dividends. It will probably suffer in most downturns and the management will increase dividends as they can afford to. It will also decrease dividend as and when required.

This company is primarily engaged in the acquisition of land for development and sale of residential communities, multi-family sites and commercial sites. It operates mostly in B.C. and Alberta. The company also develops, owns and manages commercial income properties, as well as four golf courses. Its web site is here Melcor. See my spreadsheet at mrd.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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