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Meritage Homes' (MTH) Q1 Earnings Beat Estimates, View Soft

Zacks Equity Research

Meritage Homes Corporation MTH reported first-quarter 2019 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. However, both the top and bottom lines declined year over year due to decrease in average sales price (“ASP”).

Earnings of 65 cents per share topped the consensus mark of 63 cents by 3.2%. However, the reported figure decreased 39% on a year-over-year basis. The softer performance was primarily due to combination of lower home closing revenues, contracted gross margin and higher interest expense.

Total revenues (including Homebuilding and Financial Services revenues) declined 4.6% year over year to $711 million.

Meritage Corporation Price, Consensus and EPS Surprise

Meritage Corporation Price, Consensus and EPS Surprise | Meritage Corporation Quote

Segment Discussion

Homebuilding: Revenues in the segment decreased 5% from the prior-year quarter to $708.1 million. Home closing revenues also declined 4% year over year to $698.7 million, impacted by 6% reduced ASP, offsetting the 2% increase in volume. Home closing revenues in the West region was down 10% from the year-ago level, primarily due to softness in California. This was caused by year-over-year flat home closings and 10% lower ASP.

Home closed during the quarter came in at 1,765, up 2.3% year over year, backed by the company’s strategic decision to build more spec homes ready to sell and close quickly to meet the demands of home buyers. Notably, more than two-thirds of the closings were from these spec homes. Total orders increased 7.3% from the year-ago level to 2,530 homes. The value of net orders also increased 1.5% year over year to $977 million.

However, land closing revenues of $9.5 million were down a significant 32% from $14 million a year ago.

Financial Services: The segment’s revenues increased 6% from the prior-year level to $3.2 million.

Margins

Home closing gross margin declined 40 basis points (bps) to 16.7% from the prior-year figure. The decline was mainly due to a reduction in ASP and an increase in incentives on slow-moving inventory.

Selling, general and administrative expenses (as a percentage of home closing revenues) of 12.3% were up 80 bps from the prior-year figure of 11.5%. The increase was due to additional brokerage, severance and equity compensation expense, along with expenses associated with 7% more average actively selling communities.

Pre-tax earnings came in at $32.4 million, reflecting a decrease of 34% from the year-ago period.

Balance Sheet

As of Mar 31, 2019, cash and cash equivalents totaled $327.5 million compared with $311.5 million on Dec 31, 2018. The upside was backed by positive cash flow from operations and consistent real estate assets.

As of Mar 31, 2019, debt-to-capital ratio of the company reduced to 42.9% from 43.2% on Dec 31, 2018. Also, net debt-to-capital ratio decreased to 36% from 36.7% in the said time frames.

Tepid 2019 Guidance

Meritage Homes expects full-year 2019 home closings in the range of 8,200-8,700. The midpoint of the guided range is below the year-ago reported figure of 8,531 homes. The company projects total home closing revenues in 2019 within $3.25-3.45 billion, down from $3.47 billion recorded in 2018.

The company anticipates home closing gross margin of nearly 18% and earnings within $4.65-4.95 per share in 2019. Although gross margin projection is in line with the prior year, earnings expectation is much lower than the 2018 reported figure of $5.58 per share.

Zacks Rank

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

Peer Releases

KB Home’s KBH first-quarter fiscal 2019 earnings of 31 cents per share outpaced the Zacks Consensus Estimate of 27 cents by 14.8% but declined 22.5% from 40 cents a year ago. Total revenues of $811.5 million, however, missed the consensus mark of $829.3 million and declined 6.9% year over year.

NVR, Inc.’s NVR first-quarter 2019 adjusted earnings of $47.64 per share beat the Zacks Consensus Estimate of $33.59 by 41.8%. Also, the reported figure increased 21% from the prior-year quarter. Total revenues (Homebuilding & Mortgage Banking fees combined) were $1.69 billion in the quarter, up 10% year over year on higher segmental revenues.

PulteGroup Inc.’s PHM first-quarter 2019 earnings per share came in at 59 cents, beating the consensus mark of 47 cents by 25.5%. The bottom line was in line with the year-ago figure. Total revenues of $1.99 billion outpaced the consensus mark and the year-ago figure of $1.97 billion.

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