Factors That Underscore Meritage Homes (MTH) Solid Prospects

Meritage Homes Corporation’s MTH shares have gained significantly in the past three months, after being hurt by the coronavirus outbreak. The stock has gained 98.6% in the said time frame compared with the industry’s 59.7% rally.

In first-quarter 2020, earnings and home closing revenues surpassed the respective Zacks Consensus Estimate by 45.2% and 8.5%. Also, the metrics improved significantly on a year-over-year basis, given solid home closing revenues, gross margins and overhead leverage, along with lower interest expense and income taxes.

The company — which currently holds a Zacks Rank #2 (Buy) — has been reaping benefits from focus on entry-level, first-time and move-up buyers. Also, successful execution of strategic initiatives to boost profitability and LiVE.NOW communities bodes well. However, the recent market slowdown owing to various restrictions implemented by the state and local government bodies to restrict the spread of the virus is a potent threat.

Let’s delve into the factors that might be driving investors’ sentiments and aiding it to generate profits despite headwinds. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Solid Growth Trend: Meritage Homes has a trend of generating improved profits. Its earnings surpassed the Zacks Consensus Estimate in 17 of the trailing 18 quarters. The trend is likely to continue in the near term, following strong first-quarter results and improved demand trend.

The company’s orders for April totaled 775 compared with 916 in the year-ago period. Although the metric was lower than April 2019 due to stay-in-place orders, it witnessed increased sales momentum during the last two weeks of the month. The trend was carried over in May, given increase in traffic. The company expects orders for May to be in line with the last year.

Steven J. Hilton, chairman and chief executive officer of Meritage Homes said. “Qualified buyers are taking advantage of low interest rates and choosing to move into a safe, comfortable and healthy home of their own.”

The consensus mark for 2020 earnings has moved 2.2% upward in the past seven days, reflecting analysts’ optimism about the company’s potential to generate future profits. Notably, in the second quarter, its earnings are likely to grow 1.5% year over year. The company holds a Growth Score of B, which again justifies its future growth potential.

Strategies to Boost Top-Line Growth: Meritage Homes, which share space with D.R. Horton, Inc DHI, NVR, Inc NVR and PulteGroup, Inc PHM in the same industry, is focused on meeting demand for entry-level homes with the LiVE.NOW product. Notably, its LiVE.NOW product addresses the need for lower-priced homes to solve affordability problems for first-time/entry-level buyers. During the first quarter, entry-level communities contributed 61% to order growth compared with 45% in the year-ago period. Also, the same represented 51% of total active communities at the quarter-end compared with 36% a year ago.

The company continues to witness improvement in profitability, given strong order growth, EPS improvement and rising gross margin. To this end, it is making homes out of speculations that promise faster delivery at lower costs. Also, Meritage Homes reduced the average selling price or ASP for the homes to address the needs of millennials and baby boomers who want affordable homes and highly-desirable communities.

In the first quarter, home closing revenues grew 27% year over year, despite 3% lower ASP. Again, home closing gross margin improved 330 basis points. Value of net orders grew 20.8% year over year, as demand improved from a year ago.

Recently, the seventh-largest public homebuilder in the United States added two new affordable communities in the greater Nashville area for first-time buyers. The company has designed these two new communities as part of LiVE.NOW. homes, which offer six single-family and townhome floorplans.

Superior ROE: Meritage Homes’ return on equity (ROE) is indicative of growth potential. The company’s ROE of 15.5% compares favorably with the industry average of 12.7%, implying that it is efficient in using shareholders’ funds.

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