Shares of Meritage (MTH) have been strong performers lately, with the stock up 8.3% over the past month. The stock hit a new 52-week high of $76.43 in the previous session. Meritage has gained 108% since the start of the year compared to the 39.5% move for the Zacks Construction sector and the 57% return for the Zacks Building Products - Home Builders industry.
What's Driving the Outperformance?
The stock has an impressive record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on October 22, 2019, Meritage reported EPS of $1.79 versus consensus estimate of $1.49 while it beat the consensus revenue estimate by 2.33%.
For the current fiscal year, Meritage is expected to post earnings of $5.45 per share on $3.51 billion in revenues. This represents a -2.33% change in EPS on a 0.36% change in revenues. For the next fiscal year, the company is expected to earn $6.39 per share on $3.83 billion in revenues. This represents a year-over-year change of 17.33% and 9.18%, respectively.
Meritage may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company is due for a pullback from this level.
On this front, we can look at the Zacks Style Scores, as they provide investors with an additional way to sort through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. The idea behind the style scores is to help investors pick the most appropriate Zacks Rank stocks based on their individual investment style.
Meritage has a Value Score of B. The stock's Growth and Momentum Scores are A and C, respectively, giving the company a VGM Score of A.
In terms of its value breakdown, the stock currently trades at 14X current fiscal year EPS estimates. On a trailing cash flow basis, the stock currently trades at 12X versus its peer group's average of 8.7X. Additionally, the stock has a PEG ratio of 1.66. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.
We also need to consider the stock's Zacks Rank, as this supersedes any trend on the style score front. Fortunately, Meritage currently has a Zacks Rank of #1 (Strong Buy) thanks to rising earnings estimates.
Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Meritage passes the test. Thus, it seems as though Meritage shares could have potential in the weeks and months to come.
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