- By GF Value
The stock of Meritage Homes (NYSE:MTH, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $105.83 per share and the market cap of $4 billion, Meritage Homes stock gives every indication of being modestly overvalued. GF Value for Meritage Homes is shown in the chart below.
Because Meritage Homes is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 15% over the past three years and is estimated to grow 12.77% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Meritage Homes has a cash-to-debt ratio of 0.67, which ranks in the middle range of the companies in Homebuilding & Construction industry. Based on this, GuruFocus ranks Meritage Homes's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Meritage Homes over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Meritage Homes has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $4.7 billion and earnings of $12.63 a share. Its operating margin is 12.96%, which ranks better than 72% of the companies in Homebuilding & Construction industry. Overall, GuruFocus ranks the profitability of Meritage Homes at 8 out of 10, which indicates strong profitability. This is the revenue and net income of Meritage Homes over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Meritage Homes is 15%, which ranks better than 80% of the companies in Homebuilding & Construction industry. The 3-year average EBITDA growth rate is 32.4%, which ranks better than 85% of the companies in Homebuilding & Construction industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Meritage Homes's return on invested capital is 17.06, and its cost of capital is 9.82. The historical ROIC vs WACC comparison of Meritage Homes is shown below:
In summary, the stock of Meritage Homes (NYSE:MTH, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 85% of the companies in Homebuilding & Construction industry. To learn more about Meritage Homes stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.