Undeniably, the U.S. housing market has been grappling with softness in demand, in response to affordability challenges and general market uncertainty. Nonetheless, builders are optimistic about the industry’s overall outlook, and believe that healthy economy and strong job market will aid the demand side of the equation. Meritage Homes Corporation MTH is one of the homebuilders that has managed to navigate smoothly.
Shares of this homebuilding company have gained 77% year to date compared with the industry’s 33.7% growth. Also, it has outperformed the S&P 500’s 12.2% rise in the said period. A strong brand presence and strategies relating to entry-level and first-move-up communities are providing a boost to the stock’s performance. These factors are anticipated to support the company in the upcoming quarters as well. The price performance is backed by Meritage Homes’ impressive earnings surprise history. Notably, the company’s earnings surpassed analysts’ expectations in 14 of the trailing 15 quarters.
Hence, this homebuilder is one such company that continues to display strength in several areas. Adding the stock to your portfolio should certainly not be a disappointment. Earnings estimates for 2019 and 2020 have moved up 11.8% and 13.8%, respectively, over the past 60 days, reflecting optimism in the stock’s prospects. Let us delve deeper into other factors that make this Zacks Rank #1 (Strong Buy) stock a profitable pick at the moment. You can see the complete list of today’s Zacks #1 Rank stocks here.
What’s Working in Favor of the Stock?
Focus on First-Time/Entry-Level Buyers: Given the ongoing affordability concerns, Meritage Homes’ focus on entry-level homes with the LiVE.NOW product is encouraging. This product addresses the need for lower-priced homes. The successful execution of strategic initiatives to boost profitability and its focus on entry-level LiVE.NOW homes boosted the stock’s potential. The company believes that the strategy to target entry-level buyers is gaining traction and will continue to boost its performance over the long haul. In second-quarter 2019, 41% of total communities and 52% of orders were entry level compared with 34% and 44%, respectively, in the year-ago period.
Solid Orders: The performance of Meritage Homes continues to improve, given strong order growth, EPS improvement and improving gross margin. Its strategic shift to a pure-play entry-level and first-move-up builder is expected to yield higher absorptions, aided by an improving community count growth trajectory in 2019.
In second-quarter 2019, total orders improved 21.6% from the year-ago level. Also, value of net orders grew 13.7% year over year. Notably, quarterly order volume touched a 13-year record high, driven by a 19% improved absorption pace and marginal rise in average community count. For fiscal 2019, Meritage Homes now expects home closings in the range of 8,700-9,100 compared with 8,200-8,700 projected earlier. The mid-point of the guided range is higher than the year-ago reported figure of 8,531 homes.
Prospects Solid: Meritage Homes’ strategic shift to a pure-play entry-level and first-move-up builder is expected to yield higher absorptions. It has solid prospects, as is evident from the Zacks Consensus Estimate for earnings per share (EPS) for the current quarter of $1.47, which indicates 10.5% year-over-year growth. Although the company’s earnings in 2019 are expected to fall, the same in 2020 is expected to grow 13%. Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of B.
Meanwhile, Meritage Homes has a VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 (Buy) make a solid investment choice.
Other Stocks to Consider
Other top-ranked stocks in the same space include KB Home KBH, M.D.C. Holdings, Inc. MDC and Taylor Morrison Home Corporation TMHC, each sporting a Zacks Rank #1.
KB Home’s earnings for the current year are expected to increase 56.1%.
M.D.C. Holdings has a three-five year expected EPS growth rate of 8.4%.
Taylor Morrison Home surpassed earnings estimates in all the trailing four quarters, with the average being 41.8%.
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