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Meritage Homes (MTH) Banks on Entry-Level Buyers for Growth

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Meritage Homes Corporation MTH is making the most of strategic initiatives to boost profitability and focus on entry-level buyers. Moreover, the company is benefiting from an improving housing market owing to low mortgage rates and robust demand for single-family homes in low density areas.

Moreover, the company’s strong fundamentals continue to drive earnings. The company has an outstanding earnings surprise trend. Out of the last 20 quarters, its earnings exceeded the consensus mark in 19. The trend is likely to continue in the near future on robust results through the first nine months of 2020.

Meritage Homes expects $4.2-$4.4 billion in home closing revenues in 2020 (the metric was $3.6 billion in 2019). Also, gross margin is anticipated within 21-21.5% for 2020 (versus 18.9% in 2019). The company projects earnings within $10.25-$10.50 per share for 2020 (indicating an increase from $6.42 a year ago).

Major Growth Drivers

Strategy to Target First-Time/Entry-Level Buyers: Meritage Homes continues to focus on entry-level homes with its LiVE.NOW product that addresses the need for lower-priced homes. Meritage Homes is also continuously building homes on a spec basis for LiVE.NOW. communities.

The company is optimistic about its strategy of focusing on entry-level buyers. Moreover, move-up buyers are gaining traction and will continue to boost performance. As of Sep 30, 2020, approximately 93% of its communities are targeted toward first-time or first move-up buyers and the buyer segments represented roughly 94% orders in third-quarter 2020. The company reported 40.2% year-over-year growth in total orders for the first nine months of 2020, which was driven by higher demand for entry-level homes.

Optimizing Performance: Meritage Home continues to benefit from growing orders. The company is focused on increasing its gross margin and maximizing profits. To this end, the company is adopting the speculative construction approach that promises faster delivery at a lower cost.

Also, the company has minimized the average selling price (ASP) of homes for entry-level buyers. The company has started building entry-level and affordable first time move-up communities, and first move-up communities to make it economical for purchasers. For the third quarter, despite 2.9% lower ASP, home closing revenues grew 20.7% year over year backed by these initiatives.

Robust Housing Fundamentals: Meritage Home along with other homebuilding stocks like D.R. Horton, Inc. DHI, KB Home KBH and Lennar Corporation LEN are likely to benefit from an improving housing market. The rising trend of working from home owing to the coronavirus outbreak is prompting many families to choose to live in lower-cost and low-density communities, thereby boosting demand. Notably, declining interest/mortgage rates are likely to aid the company in the upcoming quarters.

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