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Meritage Homes Focuses on First-Time Buyers, Backlog Falls

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Focus on entry-level home buyers bodes well for Meritage Homes Corporation MTH. Also, robust earnings trend and a strong brand presence are adding to the positives.

However, rising costs of labor and land, along with declining order value and backlog raise concerns.

Shares of Meritage Homes have gained 22.2% in the past three months compared with its industry’s 19.1% rally.


Major Growth Drivers

This Scottsdale, AZ-based company has undertaken various initiatives to enhance home closing gross margin, control selling, general and administrative expenses, and stabilize community count.

The company focuses on increasing the demand for entry-level homes with its LiVE.NOW product. LiVE.NOW addresses the need for lower-priced homes, considering fluctuations in interest rates and home prices.

In 2018, its total orders came in at 8,089 compared with 7,957 in the year-ago period. Home deliveries increased 10.7% year over year to 8,531 homes. 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 2018, one third of its active communities, which are classified as entry-level homes, increased about 25% on a year-over-year basis.

Meritage Homes is riding high on strong brand presence, steady earnings growth and gross margin improvement. Notably, its earnings surpassed the Zacks Consensus Estimate in 11 of the trailing 12 quarters. Its adjusted earnings in the fourth quarter and in 2018 increased 120% and 64%, respectively, from the corresponding period of 2017. The positive performance was primarily backed by strong demand of entry-level homes.

Its home sales gross margin surged 60 basis points (bps) in 2018. Higher efficiencies in operations and cost-control measures resulted in higher margins.

Causes of Concern

Most of the homebuilding companies witnessed a torrid second half of 2018 due to higher mortgage rates and rising home prices. Meritage Homes was not an exception in this regard.

In 2018, total value of net orders fell 2% from a year ago to $3,240 million, owing to a 3.3% decrease in average sales price. Also, its backlog of $1 billion (as of Dec 31, 2018) on 2,433 units declined 18.5% year over year. The decline was mainly due to 15.4% lower backlog units from the comparable year-ago period. Order cancellation rate, as a percentage of gross sales, increased 230 bps to 15.7%.

Zacks Ranks & Key Picks

Currently, Meritage Homes has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Loma Negra Compañía Industrial Argentina Sociedad Anónima LOMA, KB Home KBH and Armstrong World Industries, Inc. AWI. While Loma sports a Zacks Rank #1 (Strong Buy), both KB Home and Armstrong World carry a Zacks Ranks #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Loma, KB Home and Armstrong World’s earnings for the current year are expected to increase 119.5%, 52.6%, and 21.9%, respectively.

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