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Homebuilder Meritage Homes Corporation’s (MTH - Snapshot Report) third quarter 2013 earnings of 99 cents beat the Zacks Consensus Estimate of 81 cents by 22.2% and jumped a whopping 421% year over year. The upswing in the earnings was buoyed by a robust rise in home closing revenues, gross margin expansion and lower operating expenses.

Total revenue in the third quarter of 2013 amounted to $492.1 million, up 43.6% year over year. Reported revenues lagged the Zacks Consensus Estimate of $504 million by 2.4%. Meritage’s homebuilding revenues increased 44% to $483.2 million from the prior-year quarter and marking the eighth consecutive quarter of increase. Year-over-year growth in home closing revenues was attributable to an 18% increase in the number of homes closed and a 22% hike in average closing prices.

Net sales orders climbed 8% year over year to 1,300 units during the quarter, with 29% increase in value of net orders. However, net sales order increased 21% in the last quarter. The sequential decline, we believe, is due to moderating sales pace. Like Meritage, another homebuilder Lennar Corporation (LEN - Analyst Report) also delivered softer net order growth, when it posted its third quarter results on Sep 24.

Other homebuilders like KB Home (KBH - Analyst Report) and PulteGroup Inc (PHM - Analyst Report) have reported decline in net sales order in their recently reported quarter. We believe that the recent increase in interest/mortgage rates has slowed order pace and traffic. With the recent improvement in economic conditions and the housing market in general, mortgage rates are edging upwards to more normalized levels since May.

High interest rates dilute the demand for new homes, as mortgage loans become expensive; thus lowering a buyer’s purchasing power. Accordingly, the sharp increase in interest rates shocked many customers and a few put off their purchase decision; thus increasing cancellation rates and lowering orders.

The company closed 1,418 homes in the third quarter of 2013, up 18% year over year. The company started raising prices in most of its communities with market demand gaining momentum. The average selling price of the closings increased 22% driven by a shift toward higher priced communities.

Meritage’s backlog totaled 2,190 homes as of Sep 30, 2013, up 35.4% from 1,618 homes as of Sep 30, 2012. The value of backlog grew 65% year over year to $806.3 million in the third quarter of 2013, owing to stronger demand, 22% increase in prices and 35% growth in order backlog. The highest increase in backlog value was noted in Carolinas (177%) followed by Colorado (158%). Florida and Texas backlog value each grew by 76% over the prior year quarter. 

Adjusted home closing gross margin expanded 420 basis points from the prior-year quarter to 22.8% in the third quarter of 2013, driven by increase in home prices. 

Outlook 

Meritage believes that with the improvement in overall economy, job market and historically low mortgage rates, housing demand will continue to increase. The company raised its earnings per share expectation to the range of $2.95 to $3.05 for fiscal 2013, higher than the prior guidance range of $2.65 to $2.85. The company projects home closing revenues of approximately $1.8 billion for 2013.

We appreciate Meritage’s consistent earnings beat for the past six quarters. The company has been witnessing strong top-line growth and margin expansion, which promises steady momentum in the upcoming quarters. Meritage Homes Corp. currently carries a Zacks Rank #3 (Hold).

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