January 20, 2022

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Why Is Meritage (MTH) Down 10.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Meritage Homes (MTH). Shares have lost about 10.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Meritage due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Meritage Homes Q4 Earnings Beat Estimates, Up Y/Y

Meritage Homes Corporation reported better-than-expected earnings in fourth-quarter 2019.

Earnings of $2.65 per share topped the Zacks Consensus Estimate of $1.92 by an impressive 38%. Also, the reported figure improved 39% year over year backed by solid home closing revenues, gross margins and greater overhead leverage. It also benefitted from retroactive energy tax credits recorded in 2019.

Total revenues (including Homebuilding and Financial Services revenues) amounted to $1,141.6 million, up 12.7% from year-ago quarter’s levels.

Segment Discussion

Homebuilding/Total Closing Revenues: Revenues in the segment increased 12.7% from the prior-year quarter’s level to $1,136.8 million. Home closing revenues during the quarter amounted to $1,103.7 million, up 10.8% year over year. The upside can be attributed to a 13% increase in volumes, partially offset by 2% reduction in average sales price or ASP due to its strategic shift toward more affordable homes.

Home closing revenues in the East and West regions were both up by 19% year over year. However, Central declined 8% year over year primarily due to lower communities opening in the reported quarter.

Homes closed during the fourth quarter came in at 2,830, up 13% year over year. Total orders increased 26.6% from the prior-year quarter’s levels to 2,093 homes, marking it strongest quarterly year-over-year growth. The value of net orders also increased 24.8% year over year to $804.1 million mainly due to 37% higher absorption rate backed by rise in demand for its entry-level priced LiVE.NOW. homes.

However average community count fell 8% year on year, owing to early close-outs of communities in 2019. Active communities as of Dec 31, 2019 were 244, down from 272 homes reported in the year-ago quarter. Backlog at the end of the quarter totaled 2,782 units, up 14.3% year over year. Value of these backlogs also increased 8.1% year over year.

Home closing gross margin during the fourth quarter increased 80 basis points (bps) to 19.8% from year-ago quarter’s figure of 19%. This marked a contribution of 16% year-over-year increase to total home closing gross profit.

Moreover, land closing revenues amounted to $33.1 million, up 160% from $12.7 million in the year-ago quarter.

Financial Services: The segment’s revenues increased 7.8% from the prior-year quarter’s level to $4.7 million.

Operating Highlights

Selling, general and administrative expenses (as a percentage of home closing revenues) of 10.1% declined 50 bps from the prior-year quarter’s level of 10.6%.

Balance Sheet

As of Dec 31, 2019, cash and cash equivalents totaled $319.5 million compared with $311.5 million on Dec 31, 2018.

Debt-to-capital ratio at the end of 2019 was 34% compared with 43.2% at 2018-end. Also, net debt-to-capital ratio contracted to 26.2% from 36.7% on Dec 31, 2018.

2019 Highlights

Earnings per share for the year ended Dec 31, 2019 was reported at $6.42, up 15.1% from $5.58 reported in 2018. Home closing gross margin increased 70 bps to 18.9% from 18.2% in 2018. Total orders increased 19% year over year on the back of 37.3% increase in absorptions.
 
2020 Guidance

Given the company’s ability to deliver great value homes at modest prices along with positive economic drivers surrounding the housing market, the company is optimistic about future growth and success. It expects earnings to increase faster than its top-line growth in 2020, leveraging the operating improvements that were made earlier with further expansion and refinement.

For 2020, the company expects total home closings in the range of 9,700-10,200 units that suggests an increase from 9,267 units reported on Dec 31, 2019. Also, Meritage Homes expects ASPs in the range of $360,000-370,000 that indicates a fall from $389,000 reported last year. Home closing gross margin is expected in the mid-19%, while tax rate is expected at approximately 22%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

At this time, Meritage has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Meritage has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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