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Meritage Homes (MTH) Gains From LiVE.NOW Amid Supply Woes

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Despite challenges arising from unprecedented supply chain disruptions, delayed delivery of certain building materials and a tight labor market, the U.S. housing market remains hot, courtesy of higher demand on the back of historically low mortgage rates. More desire for spacious homes to work from home amid the pandemic has been driving growth of Meritage Homes Corporation MTH, and others such as D.R. Horton, Inc. DHI, PulteGroup, Inc. PHM as well as KB Home KBH in the Zacks Building Products - Home Builders industry.

Meritage Homes, being one of the leading designers and builders of single-family homes, has been benefiting from solid home closing volume and increase in pricing power along with a strong brand presence and focus on entry-level home buyers.

Yet, supply chain challenges, and rising land and labor costs are concerns for this Scottsdale, AZ-based homebuilder as well as for other industry bellwethers.

Let’s delve deeper into the major growth drivers of Meritage Homes.

Focus on LiVE.NOW Product

Meritage Homes remains focused on growing demand for entry-level homes with its LiVE.NOW product that addresses the need for lower-priced homes, given rising home prices. The company’s LiVE.NOW communities are aimed for the entry-level price point combining appointed affordable homes with simplified and streamlined construction and sales procedures. The successful execution of strategic initiatives to boost profitability and focus on entry-level LiVE.NOW homes boosted the upside. Meritage Homes is continuously building homes on a spec basis for LiVE.NOW. communities. During second-quarter 2021, it added 9,000 net new lots, representing 54 future communities, approximately 80% of which are targeted toward first-time buyers.

Strong Performance

During the first six months of 2021, the company’s home closing revenues increased 22% year over year to $2.3 billion, given 21% growth in home closing volumes. Earnings also grew 86% year over year for the period to $7.80 per share. The uptrend can be attributed to solid home closing volume, increase in pricing power, expanded gross margin and improved overhead leverage. A strong brand presence and strategies relating to entry-level and first-move-up communities are providing a boost to the stock’s performance.

Solid Backlog Level

The company’s second quarter-end backlog totaled 5,509 units, up 25% year over year. Value of the backlog also increased 41% year over year to $2.32 billion, with a hike of 12% in average selling price. It reported 4% year-over-year growth in total orders for first-half 2021 driven by sound market conditions, as absorptions were up 21% from a year ago. Also, higher demand for entry-level homes added to the positives. In fact, entry-level homes comprised 81% of second-quarter 2021 orders compared with 70% in the year-ago period.

Concerns

The company has been witnessing a shortage of some home building materials due to the ongoing pandemic-related supply chain disruptions, certain weather events and 12-plus months of elevated demand. At present, a shortage of buildable lots, skilled labor, and capital for smaller builders is limiting home production, thereby lowering the inventory of homes, both new and existing. The labor market has also tightened, with limited availability of labor arresting the rapid growth in housing production. If the supply picture does not improve, prices could go up, thereby affecting affordability.


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