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Meritage Homes (MTH) Q4 Earnings Beat Estimates, Up Y/Y

Zacks Equity Research

Meritage Homes Corporation MTH reported fourth-quarter 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings of $1.91 per share surpassed the consensus mark of $1.51 by 20.5%. Notably, the reported figure also increased 120% on a year-over-year basis. The positive performance was primarily backed by strong demand of entry-level homes.

Meritage Corporation Price, Consensus and EPS Surprise

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

Revenue Discussion

Homebuilding: Revenues in the Homebuilding segment increased 6.6% from the prior-year quarter to $1,008.8 million. Home closing revenues grew 8% year over year to $996.1 million, aided by 11% higher home deliveries. However, land closing revenues were $12.7 million, down from $23.1 million a year ago.

Home closings of 2,505 homes grew 11% year over year, backed by higher deliveries throughout the regions served by the company expect California. Home deliveries in California declined 21% due to lower absorption and fewer communities on average compared with the year-ago quarter. Also, average sales price was 3% lower than the prior-year level, mainly due to a shift toward more entry-level homes.

Total orders decreased 8% from the year-ago period to 1,653 homes. The value of net orders fell 15% year over year to $644.2 million.

Financial Services segment revenues increased 8.6% from the prior-year level to $4.4 million.

Margins

Home sales gross margin increased to 19%, up 80 basis points (bps) from the prior-year figure of 18.2%. Notably, the said figure is the highest since 2015. Higher efficiencies in operations and cost-control measures resulted in higher margins during the quarter.

Selling, general and administrative expenses, as a percentage of home closing revenues, were up 20 bps to 10.6% due to additional marketing costs and sales commissions during the quarter.

Pre-tax earnings came in at $91.8 million, reflecting an increase of 9% from the year-ago period.

Balance Sheet

As of Dec 31, 2018, cash and cash equivalents totaled $311.5 million compared with $170.7 million on Dec 31, 2017. The upside was backed by a reduction of $209 million in total land and development spending in 2018. The reduction was mainly due to lower average cost of new entry-level lots and reduced spending.

Meanwhile, the company repurchased and retired approximately $2.58 million of its common stock under the share repurchase authorization of $100 million.

Debt-to-capital ratio of the company reduced to 43.2% as of Dec 31, 2018 from 44.9% on Dec 31, 2017. Also, net debt-to-capital ratio decreased to 36.7% from 41.4% in the said time frames.

2018 Highlights

Meritage Homes’ full-year 2018 adjusted earnings of $5.58 per share surpassed the consensus estimate of $5.22 by 6.9%. Also, the said figure increased 64% on a year-over-year basis.

Total home closing revenues amounted to $3.47 billion, reflecting a 9% year-over-year increase. Home deliveries during the year grew 11% from the year-ago level to 8,531 homes. However, home order value decreased 2% from a year ago. Home closing gross margin improved 60 bps to 18.2% in 2018.

Total orders grew 2% from the prior-year level to 8,089 in the full year of 2018, however, value of net orders fell 2% to $3,240 million. Meanwhile, pre-tax earnings improved 14% from a year ago to $283.3 million.

Zacks Rank & Key Picks

Currently, Meritage Homes carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Construction sector include Gates Industrial Corporation PLC GTES, Lennox International Inc. LII, and Great Lakes Dredge & Dock Corporation GLDD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Gates Industrial, Lennox and Great Lakes’ earnings for the current year are expected to increase 44.6%, 18.9% and 111%, respectively.

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