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Why Is Meritage (MTH) Up 42.1% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Meritage Homes (MTH). Shares have added about 42.1% 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 its most recent earnings report in order to get a better handle on the important drivers.

Meritage Homes’ Q1 Earnings Top Estimates, Up Y/Y

Meritage Homes Corporation reported impressive results in first-quarter 2020. Both earnings and home closing revenues surpassed the respective Zacks Consensus Estimate and improved significantly on a year-over-year basis.

Meritage Homes’ chairman and chief executive officer Steven J. Hilton said “Though our net earnings for the first quarter more than doubled and every key operating metric showed significant year-over-year growth, we are expecting much weaker results for at least the next couple of quarters due to large parts of the economy being shut down, causing record job losses, fear and uncertainty about the future.”

Earnings & Revenue Discussion

The company reported earnings of $1.83 per share, beating the Zacks Consensus Estimate of $1.26 by an impressive 45.2%. Also, the reported figure increased a whopping 182% year over year from 65 cents in the prior-year quarter. The uptrend was due to solid home closing revenues, gross margins and overhead leverage, along with lower interest expense and income taxes in the first quarter.

Total revenues (including Homebuilding and Financial Services revenues) amounted to $904.9 million, up 21.4% from the year-ago level due to stronger-than-anticipated market demand through early March.

Segment Discussion

Homebuilding/Total Closing Revenues: Revenues in the segment increased 27% from the prior-year level to $901 million. Home closing revenues totaled $890.4 million, up 27% year over year. The upside can be attributed to a 31% increase in volumes, partially offset by a 3% reduction in average sales price or ASP due to the shift in product mix toward lower-priced entry-level homes.

The West, Central and East regions recorded revenue growth of 38%, 34% and 10% year over year, respectively.

Homes closed during the quarter were 2,316, up 31.2% year over year. Total orders increased 23% from the prior year to 3,102 homes, backed by a 35% increase in absorptions. Of this order growth, 38% was in January and 51% in February. Total orders in March declined 8%, partially offsetting the improvement. Absorptions in each of the West and Central regions were up 41%. In the East region, absorption was 20%.

Entry-level orders contributed 61% to total order growth compared with 45% in the year-ago period. Also, entry-level orders represented 51% of total active communities at the quarter-end compared with 36% a year ago.

The value of net orders also increased 20.8% year over year to $1.18 billion. Order cancellations were flat year over year at 13%, as March cancellations increased to 16% from 12% in the prior year.

However, average community count fell to 241 from 260 a year ago.

Backlog at the end of the quarter totaled 3,568 units, up 11.6% year over year. Value of the backlog also increased 7.2% year over year.

During the quarter, home closing gross margin increased 330 basis points (bps) to 20%. This resulted in a 53% year-over-year increase in total home closing gross profit. Pre-tax margin also surged an impressive 500 bps to 9.6% from 4.6% reported in first-quarter 2019.

Land closing revenues amounted to $10.6 million, up 12% from $9.5 million in the year-ago quarter.

Financial Services: The segment’s revenues increased 21% from the prior-year level to $3.9 million.

Balance Sheet

As of Mar 31, 2020, cash and cash equivalents totaled $797.3 million compared with $319.5 million on Dec 31, 2019. Cash and cash equivalents include $500 million borrowings on its $780-million revolving credit facility to provide additional flexibility in this unprecedented period.

At first quarter-end, the company had 41,500 total lots owned or under control compared with 33,800 as of Mar 31, 2019. Total inventory of spec homes was 2,703 in 2020, up from 2,205 a year ago.

Total debt to capital at the end of the quarter was 43.3% compared with 32% at 2019-end. Net debt to capital increased to 26.6% from 26.2% on Dec 31, 2019. The company repurchased 1 million shares of common stock for a total of $60.8 million in the first quarter. The company has suspended further repurchase of stocks for an indefinite period.






Revokes 2020 Guidance

Uncertainties in business operations arising from the COVID-19 outbreak prompted Meritage Homes to withdraw its previously issued 2020 guidance.

The company witnessed slower absorption and higher cancellations in mid-March, stretching into April. Since the current market conditions will likely continue for an undefined period, the company has significantly lowered investments in land acquisition and development, and spec inventory to preserve cash.

Nonetheless, the company has been undertaking several steps to continue selling, building and delivering homes by leveraging the existing digital platform and tools. It is also finding creative ways to interact with customers and other stakeholders.

The company has been dealing with customers virtually or arranging appointments in its sales offices and Studio M design centers. Also, its 24/7 mortgage pre-approval online tools are helping customers to purchase homes more quickly.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 41.18% due to these changes.

VGM Scores

Currently, Meritage has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Meritage has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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