Why Is Meritage (MTH) Up 15.4% Since Last Earnings Report?
A month has gone by since the last earnings report for Meritage Homes (MTH). Shares have added about 15.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Meritage due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Meritage Homes Q3 Earnings Beat, Orders Up, Backlog Falls
Meritage Homes reported better-than-expected results for third-quarter 2023. Both earnings and total closing revenues surpassed the Zacks Consensus Estimate.
Although earnings declined from the year-ago quarter’s levels, revenues improved as the company continued to offer a full range of incentives to help buyers solve for a monthly payment. Despite the elevated interest rate environment, the ongoing shortage of existing home inventory for sale and the housing need among millennials and baby boomers boosted demand.
Management recorded 96% backlog conversion as well as the highest third quarter of home closings and home closing revenues during the quarter on improved cycle time and its spec-building strategy.
Earnings & Revenue Discussion
Earnings of $5.98 per share topped the Zacks Consensus Estimate of $5.10 by 17.3% but declined 16% year over year from $7.10 posted a year ago. The decline mainly stemmed from a lower gross margin, greater overhead costs and a higher tax rate.
Total revenues (including Homebuilding and Financial Services revenues) amounted to $1.62 billion compared with $1.58 billion reported in the year-ago period.
Segment Discussion
Homebuilding: Total closing revenues were $1,613.1 million, up 2% from the prior-year quarter’s level. The metric beat the consensus mark of $1,550 million by 4.1%.
Under the Homebuilding umbrella, home closing revenues totaled $1,610.3 million, up 3% from the prior-year quarter’s level of $1,569 million, backed by improving housing demand and cycle times. Land closing revenues amounted to $2.78 million, significantly down from $9 million reported in the year-ago quarter.
MTH reported 3,638 units of homes closed, up 4% from 3,487 units year over year. The average sales price (“ASP”) declined 2% lower from a year ago to $443,000 due to more costly financing incentives.
Total home orders rose 50% from the prior year to 3,474 homes. In dollars, home orders increased 53% year over year to $1.5 billion on a 2% higher ASP of $430,000. Average absorptions per store was 4.1 per month, up 52% from 2.7 per month in the previous year. However, the average community count declined by 3% year over year.
Entry-level buyers represented 88% of sales orders for the current as well as the year-ago period.
The quarter-end backlog totaled 3,608 units, down 41% year over year. The value of the backlog also decreased by 45% year over year to $1.56 billion.
Adjusted home closing gross margin contracted by 200 basis points (bps) to 26.7% due to higher financing incentives, partially offset by savings from shortening cycle times.
Selling, general and administrative expenses — as a percentage of home closing revenues — increased 200 bps to 10.1% from the prior-year quarter due to higher broker commissions and increased compensation costs.
Financial Services: The segment’s revenues fell 3% from the prior-year quarter’s level to $6.11 million.
Balance Sheet
At the end of third-quarter 2023, cash and cash equivalents totaled $1 billion compared with $861.6 million on Dec 31, 2022. At the end of Sep 2023, 60,700 lots were owned or controlled by the company compared with 66,000 lots a year ago.
Total debt to capital was 18.5% compared with 22.6% at 2022-end. Net debt to capital was negative 1% versus positive 6.8% on Dec 31, 2022.
Net cash provided by operating activities for the first nine months of 2023 was $355.9 million versus net cash used in operating activities of $206.8 million a year ago.
MTH repurchased 413,013 shares of its common stock for $55 million during the first nine months. As of Sep 30, 2023, $189.1 million shares remained under the authorized share repurchase program.
Q4 Outlook
MTH expects housing demand to remain steady in the near future. Also, it plans to continue to invest in land inventory and steadily increase its community count over the next few years.
MTH projects 3,500-3,700 home closings for fourth-quarter 2023, which is likely to generate home closing revenues of $1.45-1.53 billion. Home closing gross margin is expected to be in the 25-26% range. It expects earnings to be within $4.84-5.43 per share. It estimates an effective tax rate of 23%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
The consensus estimate has shifted -8.59% due to these changes.
VGM Scores
Currently, Meritage has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Meritage has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Meritage belongs to the Zacks Building Products - Home Builders industry. Another stock from the same industry, PulteGroup (PHM), has gained 14% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.
PulteGroup reported revenues of $4 billion in the last reported quarter, representing a year-over-year change of +1.5%. EPS of $2.90 for the same period compares with $2.69 a year ago.
PulteGroup is expected to post earnings of $3.20 per share for the current quarter, representing a year-over-year change of -11.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.6%.
PulteGroup has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.
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