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Meritage Homes' (MTH) 2-Month Preliminary Orders In Line Y/Y

Zacks Equity Research

Meritage Homes Corporation MTH provided preliminary order details for the first two months of 2019, which is in line with the prior-year comparable period. The company received orders for 738 homes in January and 748 in February compared with 673 and 807 in the comparable year-ago period, respectively.

This Scottsdale, AZ-based company, which has a strong brand presence, focuses on first-time and first move-up buyers. The company has undertaken various initiatives to improve home closing gross margin, selling, general and administrative cost-control measures, alongside community count stability.

Focus on Entry-Level Home Buyers Bodes Well

Meritage Homes’ demand for entry-level homes is growing, given LiVE.NOW communities that are easily accessible and cost effective. It is continuously building homes on a spec basis for LiVE.NOW communities. In fact, approximately 40% of the total orders received in 2018 were generated from entry-level buyers.

In 2018, the company received 8,089 orders compared with 7,957 a year ago. Home deliveries also grew 10.7% from the year-ago level 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.

Meanwhile, the company is mainly focused on increasing gross margin and maximizing profits. It is making homes out of speculations that promise faster delivery at a lower cost. Notably, home sales gross margin in 2018 expanded 60 basis points (bps) year over year to 18.2%, backed by pricing power, alongside the introduction of new and innovative concepts in the East region, in turn offsetting the negative impact of higher costs.

However, total value of net orders fell 2% in the year from a year ago to $3,240 million due to 3.3% decrease in average sales price. Also, its backlog of $1 billion on 2,433 units declined 18.5% year over year, as the units fell short of 15.4% in the year-ago period. Meanwhile, order cancellation rate, as a percentage of gross sales, increased 230 bps to 15.7%.

Meritage Homes and other notable homebuilding companies like KB Home KBH, Toll Brothers, Inc. TOL, D.R. Horton, Inc. DHI and Lennar Corporation LEN has been experiencing housing market slowdown over the last three quarters. Rising mortgage rates and home prices, mainly in the second half of 2018, make potential homebuyers more cautious.

Recent Housing Market Trend

The U.S. housing market has started retrieving gradually. Mortgage rates have started declining since November 2018. Construction material prices also fell 0.7% month-over-month in January 2019. Market experts are of the opinion that healthy job market, faster wage growth and lower mortgage rates are helping to generate more sales. Moreover, homebuilders remain confident about the upcoming spring season, given recovery of market.

Meritage Homes’ Price Performance

Shares of Meritage Homes have gained 20.8% in the past three months compared with its industry’s 11.5% growth. The upside was backed by the company’s impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in six of the trailing seven quarters.

Zacks Rank

Currently, Meritage Homes carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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