Why is Meritage (MTH) up 4.6% since its last earnings report?

It has been about a month since Meritage Homes (MTH) last reported earnings. Shares have risen about 4.6% in that time, outperforming the S&P 500.

Will the recent positive trend continue until the next earnings release, or is Meritage headed for a decline? 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 key drivers.

Meritage Homes’ first quarter results are better, orders and backlogs are up

Meritage Homes Corporation reported impressive first-quarter 2024 results. Both earnings and total closing revenues exceeded the Zacks Consensus Estimate and increased year-over-year. The positive result was supported by higher deliveries.

Solid specification execution and streamlined strategy helped it achieve another record backlog conversion rate of 138% and return on equity of 18% during the quarter.

Discussion about earnings and revenues

Earnings per share (EPS) of $5.06 surpassed the Zacks Consensus Estimate and year-ago earnings of $3.54 by 42.9%.

Total revenues (including home construction and financial services revenues) were $1.472 billion, up 14.5% from the $1.285 billion recorded in the same period last year.

Segment discussion

Building a house: Year-end total revenues were $1.468 billion, up 15% from the prior-year quarter’s $1.26 billion and 14.5% ahead of the consensus estimate of $1.28 billion.

Homebuilding saw home closing revenues of $1.466 billion, up 16% from the prior-year quarter’s $1.26 billion. Land closing revenues were $2.31 million, down 87% from $17.4 million reported in the same quarter last year.

MTH reported 3,507 unit closings, up 21% from 2,897 units year-over-year. ASP was 4% lower than the prior year at $418,000 due to changes in product mix. ASP increased sequentially due to reduced use of interest rate lock financing incentives and price increases.

The total number of housing orders increased by 14% compared to the previous year and amounted to 3,991 houses. In dollar terms, home orders increased 8% year-over-year to $1.63 billion. A 5% lower ASP of $409,000 due to geographic and product mix changes contributed to some growth. Strong demand and adequate on-hand inventory, with a cancellation rate of just 8%, contributed to quarterly sales order volumes. Average absorption per store was 4.9 per month, up 17% from 4.2 the previous year. However, the average community count decreased by 1% year over year.

Entry-level buyers represented 91% of sales orders compared to 87% in the year-ago period.

Backlog at quarter-end was 3,033 units, down 23% year-over-year. Backlogs also declined 29% year-over-year to $1.24 billion.

Adjusted home closing gross margin increased 340 basis points (bps) to 25.8%. Selling, general and administrative expenses – as a percentage of home closing revenues – increased 10 basis points to 10.4% compared to the prior-year quarter due to higher commission rates.

Financial services: Segment revenue increased 11% from the prior-year level to $6.35 million.

The story continues

Balance

At the end of the first quarter of 2024, cash and cash equivalents were $905.3 million compared to $921.2 million at December 31, 2023. At the end of March 2024, the company owned or controlled 66,400 lots compared to 60,900 items a year ago.

Total capital debt was 17.5% compared to 17.9% at the end of 2023. Net debt to capital was 2% compared to 1.9% as at December 31, 2023.

Net cash from operating activities for the reported quarter was $81.9 million compared to $124.5 million a year ago.

The company recently raised its quarterly cash dividend to 75 cents per share from 27 cents and paid a dividend of $27.2 million in the first quarter. It repurchased 362,419 shares of common stock for $55.9 million. As of March 31, 2024, $129.1 million of shares remained under the authorized share repurchase program.

Outlook for 2024

MTH Executive Chairman Steven J. Hilton stated, “We entered the spring selling season with a strong supply of available inventory and were able to take advantage of the current strong market conditions resulting from increasing demand for housing from Millennials, Gen Zers and Gen Zers. baby boomers moving downstream, and all existing housing stock is limited.”

MTH anticipates 14,500-15,000 home closings during the year, likely generating $6-6.2 billion in home closing revenue ($6.06 billion reported in 2023). Home closing gross margin is expected to be in the range of 24.5-25% compared to 24.9% in 2023. EPS is also expected to be in the range of $19.20-$20.70 compared to $19.93 recorded in 2023. The effective tax rate is estimated to be 22.5%.

How have estimates changed since then?

It turns out that new estimates have been trending upwards over the past month.

As a result of these changes, the consensus estimate moved by 21.09%.

VGM results

At this point, Meritage has a weak Growth Score of D, but its Momentum Score is doing much better at A. Plotting a somewhat similar path, the stock was given a B on the Value side, putting it in the top 40% for this investment strategy.

Overall, the stock has a composite VGM score of B. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for the stock are trending upwards, and the scale of these revisions looks promising. Notably, Meritage carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

Industry player performance

Meritage is part of the Zacks Building Products – Home Builders industry. Another stock in the same industry, PulteGroup (PHM), has gained 1.2% over the past month. More than a month has passed since the company announced its results for the quarter ended March 2024.

In the most recent quarter, PulteGroup reported revenues of $3.95 billion, representing a year-over-year change of +10.5%. EPS of $2.87 in the same period compared to $2.35 a year ago.

For the current quarter, PulteGroup is expected to report earnings per share of $3.20, representing a change of +6.7% from the prior-year quarter. The Zacks Consensus Estimate has changed +2.7% over the past 30 days.

PulteGroup has a Zacks Rank #1 (Strong Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Rating of C.

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