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Why Is Meritage (MTH) Up 15.6% Since Last Earnings Report?
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It has been about a month since the last earnings report for Meritage Homes (MTH - Free Report) . Shares have added about 15.6% 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 catalysts.
Meritage Homes Q3 Earnings Beat, Gross Margin Falls
Meritage Homes Corporation reported mixed results for third-quarter 2022, with earnings surpassing the Zacks Consensus Estimate and increasing year over year. Revenues rose from the year-ago quarter’s levels but lagged the consensus mark.
Despite prevailing challenges like interest rate hikes, supply chain issues, Hurricane Ian and market uncertainty, Meritage Homes achieved the highest quarterly home closing revenue and record quarterly earnings.
Phillippe Lord, the CEO of MTH, said, “Our third quarter 2022 average absorption pace was 2.7 per month, which was down from 5.0 per month in the third quarter of 2021. We expect sales orders will remain weaker until mortgage interest rates stabilize, we complete more move-in ready inventory and close out of our mature backlog. In each market, we are working to find the right combination of price adjustments and incentives to get back to our target absorption pace of 3-4 net sales per month.”
Earnings & Revenue Discussion
Meritage Homes reported earnings of $7.10 per share, which topped the Zacks Consensus Estimate of $6.41 by 10.8% and increased 35% year over year. The uptrend was due to solid home closing revenue, improved overhead leverage and an energy tax credit catch-up.
Total revenues (including Homebuilding and Financial Services revenues) amounted to $1.58 billion, up 25.2% from the year-ago quarter’s levels, backed by segmental revenues.
Segment Discussion
Homebuilding: Total closing revenues totaled $1,578 million, up 25% from the prior-year quarter’s level of $1,259.9 million. The metric lagged the consensus mark of $1,633 million by 3.4%. Home closing revenues totaled $1,569 million, up 25% from the prior-year quarter’s level of $1,251.4 million. The upside can be attributed to a 12% increase in average sales price or ASP and volumes.
During the quarter, the company reported homes closed of 3,487 units, up 12% year over year. Total home orders declined 33% from the prior year to 2,310 homes, due to 30% cancellation rate resulting in a 46% decrease in average absorptions per store to 2.7 per month from 5 per month a year ago. In dollars, home orders fell 35% year over year to $974.3 million on a 3% lower ASP. The average community count increased 25% year over year to 289 homes.
Entry-level buyers represented 88% of sales order compared with 84% in the year-ago quarter. Quarter-end backlog totaled 6,064 units, up 4% year over year. The value of the backlog also increased 11% year over year to $2.83 billion.
Home closing gross margin contracted 100 basis points (bps) to 28.7%. Selling, general and administrative expenses — as a percentage of home closing revenues — improved 120 bps to 8.1% from the prior-year quarter’s levels. The uptrend was mainly driven by the continued leverage of fixed costs on higher home closing revenues and lower broker commissions.
Land closing revenues amounted to $8.99 million, up 6% from $8.47 million in the year-ago quarter.
Financial Services: The segment’s revenues rose 21% from the prior-year quarter’s level to $6.31 million.
Balance Sheet
At the third quarter-end, cash and cash equivalents totaled $299.4 million compared with $618.3 million on Dec 31, 2021. At September-end, 66,000 lots were owned or controlled by the company compared with 70,000 lots a year ago.
Total debt to capital at quarter-end was 23.9% compared with 27.6% at 2021-end. Net debt to capital was 18.9% versus 15.1% on Dec 31, 2021. MTH repurchased 1,166,040 shares of its common stock for $109.3 million during the first nine months of 2022. As of Sep 30, 2022, $244.1 million shares remained under the authorized share repurchase program.
Q4 Guidance
For the fourth quarter, Meritage Homes expects 4,300- 4,700 home closings, which will likely generate quarterly home closing revenue of $1.85-2.10 billion. Home closing gross margin is projected to be 25% and earnings are likely to be within the $6.50-7.40 range with an effective tax rate of 23.5%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
Currently, Meritage has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, 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 C. 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, NVR (NVR - Free Report) , has gained 8.2% over the past month. More than a month has passed since the company reported results for the quarter ended September 2022.
NVR reported revenues of $2.74 billion in the last reported quarter, representing a year-over-year change of +17.2%. EPS of $118.51 for the same period compares with $86.44 a year ago.
NVR is expected to post earnings of $104.10 per share for the current quarter, representing a year-over-year change of +16.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -8.9%.
NVR has a Zacks Rank #4 (Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.
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Why Is Meritage (MTH) Up 15.6% Since Last Earnings Report?
It has been about a month since the last earnings report for Meritage Homes (MTH - Free Report) . Shares have added about 15.6% 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 catalysts.
Meritage Homes Q3 Earnings Beat, Gross Margin Falls
Meritage Homes Corporation reported mixed results for third-quarter 2022, with earnings surpassing the Zacks Consensus Estimate and increasing year over year. Revenues rose from the year-ago quarter’s levels but lagged the consensus mark.
Despite prevailing challenges like interest rate hikes, supply chain issues, Hurricane Ian and market uncertainty, Meritage Homes achieved the highest quarterly home closing revenue and record quarterly earnings.
Phillippe Lord, the CEO of MTH, said, “Our third quarter 2022 average absorption pace was 2.7 per month, which was down from 5.0 per month in the third quarter of 2021. We expect sales orders will remain weaker until mortgage interest rates stabilize, we complete more move-in ready inventory and close out of our mature backlog. In each market, we are working to find the right combination of price adjustments and incentives to get back to our target absorption pace of 3-4 net sales per month.”
Earnings & Revenue Discussion
Meritage Homes reported earnings of $7.10 per share, which topped the Zacks Consensus Estimate of $6.41 by 10.8% and increased 35% year over year. The uptrend was due to solid home closing revenue, improved overhead leverage and an energy tax credit catch-up.
Total revenues (including Homebuilding and Financial Services revenues) amounted to $1.58 billion, up 25.2% from the year-ago quarter’s levels, backed by segmental revenues.
Segment Discussion
Homebuilding: Total closing revenues totaled $1,578 million, up 25% from the prior-year quarter’s level of $1,259.9 million. The metric lagged the consensus mark of $1,633 million by 3.4%. Home closing revenues totaled $1,569 million, up 25% from the prior-year quarter’s level of $1,251.4 million. The upside can be attributed to a 12% increase in average sales price or ASP and volumes.
During the quarter, the company reported homes closed of 3,487 units, up 12% year over year. Total home orders declined 33% from the prior year to 2,310 homes, due to 30% cancellation rate resulting in a 46% decrease in average absorptions per store to 2.7 per month from 5 per month a year ago. In dollars, home orders fell 35% year over year to $974.3 million on a 3% lower ASP. The average community count increased 25% year over year to 289 homes.
Entry-level buyers represented 88% of sales order compared with 84% in the year-ago quarter. Quarter-end backlog totaled 6,064 units, up 4% year over year. The value of the backlog also increased 11% year over year to $2.83 billion.
Home closing gross margin contracted 100 basis points (bps) to 28.7%. Selling, general and administrative expenses — as a percentage of home closing revenues — improved 120 bps to 8.1% from the prior-year quarter’s levels. The uptrend was mainly driven by the continued leverage of fixed costs on higher home closing revenues and lower broker commissions.
Land closing revenues amounted to $8.99 million, up 6% from $8.47 million in the year-ago quarter.
Financial Services: The segment’s revenues rose 21% from the prior-year quarter’s level to $6.31 million.
Balance Sheet
At the third quarter-end, cash and cash equivalents totaled $299.4 million compared with $618.3 million on Dec 31, 2021. At September-end, 66,000 lots were owned or controlled by the company compared with 70,000 lots a year ago.
Total debt to capital at quarter-end was 23.9% compared with 27.6% at 2021-end. Net debt to capital was 18.9% versus 15.1% on Dec 31, 2021. MTH repurchased 1,166,040 shares of its common stock for $109.3 million during the first nine months of 2022. As of Sep 30, 2022, $244.1 million shares remained under the authorized share repurchase program.
Q4 Guidance
For the fourth quarter, Meritage Homes expects 4,300- 4,700 home closings, which will likely generate quarterly home closing revenue of $1.85-2.10 billion. Home closing gross margin is projected to be 25% and earnings are likely to be within the $6.50-7.40 range with an effective tax rate of 23.5%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
Currently, Meritage has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, 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 C. 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, NVR (NVR - Free Report) , has gained 8.2% over the past month. More than a month has passed since the company reported results for the quarter ended September 2022.
NVR reported revenues of $2.74 billion in the last reported quarter, representing a year-over-year change of +17.2%. EPS of $118.51 for the same period compares with $86.44 a year ago.
NVR is expected to post earnings of $104.10 per share for the current quarter, representing a year-over-year change of +16.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -8.9%.
NVR has a Zacks Rank #4 (Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.