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Meritage (MTH) Down 7.4% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Meritage Homes (MTH). Shares have lost about 7.4% 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 catalysts.

Meritage Homes (MTH) Beats Q3 Earnings & Revenue Estimates

Meritage Homes Corporation reported third-quarter 2019 results, with earnings and revenues surpassing the Zacks Consensus Estimate on strong homebuying activity.

Earnings of $1.79 per share topped the consensus mark of $1.49 by 19.9%. Also, the reported figure improved 35% year over year backed by home closing revenues, gross margins and greater overhead leverage.

Home closing revenues amounted to $939.2 million that surpassed the consensus mark of $914 million by 2.3% and rose 7% year over year. Meanwhile, total revenues (including Home closing, Land closing and Financial services revenues) totaled $945.2 million, up 6.4% from year-ago quarter’s levels.

Segment Discussion

Homebuilding/Total Closing Revenues: Revenues in the segment increased 6% from the prior-year quarter’s tally to $940.9 million. The upside can be attributed to a 12% increase in volume, partially offsets by 4% reduction in average sales price (ASP) due to shift in product mix.

Home closing revenues in the East and Central regions were up by 15% and 9% year over year, respectively, while West remained flat.

Homes closed during the quarter came in at 2,419, up 12% year over year. Home closing gross margin for the third quarter increased 170 basis points (bps) to 19.8% from year-ago quarter’s figure, contributing 17% year-over-year increase to total home closing gross profit.

Total orders increased 24% from the prior-year quarter’s levels to 2,258 homes. The value of net orders also increased 20% year over year to $858.4 million mainly due to higher absorption rate.

However, land closing revenues amounted to $1.7 million that declined from $6.8 million in the year-ago quarter.

Financial Services: The segment’s revenues increased 13% from the prior-year quarter’s level to $4.3 million.

Operating Highlights

Selling, general and administrative expenses (as a percentage of home closing revenues) of 10.7% fell 30 bps from the prior-year quarter’s level of 11%.

Balance Sheet

As of Sept 30, 2019, cash and cash equivalents totaled $454.8 million compared with $311.5 million on Dec 31, 2018.

As of Sept 30, debt-to-capital ratio of the company fell to 41.1% from 43.2% on Dec 31, 2018. Also, net debt-to-capital ratio contracted to 31.3% from 36.7% on Dec 31, 2018.

Raised 2019 Guidance

Meritage Homes now expects 2019 home closings in the range of 8,900-9,100 compared with 8,700-9,100 projected earlier. The company expects total home closing revenues of approximately 3.5 billion, maintaining the mid-point of its previously guided range of $3.4-$3.6 billion.

The company anticipates home closing gross margin in mid to high 18% and earnings in the range of $5.50-$5.70 per share compared with $5.20-5.50 expected earlier.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Meritage has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Meritage has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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