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Meritage Homes Looks Strong Going Into 2020: Here's Why

Zacks Equity Research

Meritage Homes Corporation’s MTH shares have jumped more than 67% in a year compared with its industry’s 47% rally. The bull run is likely to continue as the company has an impressive earnings growth rate and solid fundamental. Notably, the company earnings are expected to grow 20.3% in 2020 compared with the industry’s average of 11.1%. On a further encouraging note, Meritage Homes is expected to register 9% earnings growth in three-five years.

Continuous focus on building homes for entry-level, first-time and move-up buyers has been yielding positive results. Also, strong brand presence, and innovation and strategies relating to entry-level/first-move-up communities along with strong housing industry prospects should drive the stock’s performance in the upcoming quarters.

Notably, the company’s impressive earnings surprise trend, having surpassed the Zacks Consensus Estimate in 14 of the trailing 15 quarters, bodes well.

Let’s delve deeper into the factors that are substantiating growth of the Zacks Rank #2 (Buy) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strategy to Target First-Time/Entry-Level Buyers: Meritage Homes remains focused on meeting demand for entry-level homes with its LiVE.NOW product. Notably, its LiVE.NOW product addresses the need for lower-priced homes to solve the affordability problems for first-time/entry-level buyers.

Meritage Homes is continuously building homes on a spec basis for LiVE.NOW communities. The company believes that this strategy is gaining traction and will continue to boost its future performance. During third-quarter 2019, move-up homes contributed 54% to total orders compared with 43% a year ago.

Optimizing Growth and Performance: Meritage Homes continues to improve, given its strong order growth, EPS improvement and improving gross margin. To this end, it is making homes out of speculations that promise faster delivery at lower costs. In the first nine months of 2019, value of net orders increased 11% from the prior-year period.

Also, it reduced the average selling price or ASP for the homes to addresses the needs of millennials and baby boomers, who want affordable homes and highly desirable communities. The company’s 2019 home closing gross margin is likely to be in the mid-to-high 18% range and earnings are expected to be $5.50-5.70 per share (whereas it reported $5.58 in 2018).

Strong Housing Fundamentals: The overall homebuilding industry, which includes bigwigs like D.R. Horton, Inc DHI, NVR, Inc NVR and PulteGroup, Inc PHM, remains positive for 2020 on ongoing traffic trends that indicate higher inclination of buyers. Notably, declining interest/mortgage rates, lower construction costs, low unemployment and increasing wages are somewhat offsetting other ongoing supply-side headwinds. Further, as more millennials are leaving their parents’ home, a sharp hike in household formation is likely to translate into higher demand for new homes.

Backed by its solid third-quarter results, healthy employment levels, growing household incomes and low interest rates, the company is projecting 8,900-9,100 home closings for 2019. Notably, the said range is higher than 8,700-9,100 stated earlier. It expects these homes to generate $3.5 billion in total home closing revenues.

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