Meritage Beats EPS on Order Growth

Meritage Homes Corporation ( MTH - Snapshot Report ) second quarter adjusted (for impairments and extinguishment of debt) earnings per share of 29 cents which largely beat the prior-year quarter adjusted earnings of 4 cents owing to robust new order growth. The company results also beat the Zacks Consensus Estimate of 27 cents.

Total revenue is $282 million, up 28% year-over-year. Meritage’s home closing revenue was $281.3 million, up 28% from the prior-year quarter. The company results lagged the Zacks Consensus Estimate of $284 million. Home closing revenue grew due to a 22% increase in home closings and 5% hike in average closing prices year over year, attributable to a shift in mix towards high priced homes and communities.

The company closed 1,042 homes in the second quarter of 2012 versus 856 closings in the prior-year quarter. Sales growth was highest in California and Florida, followed by Colorado and Arizona. As the market demand is getting stronger, the company has started raising prices in most of the communities.

Net sales orders climbed 49% year-over-year to 1,353 units during the quarter, reflecting sales order gains across all states except Nevada. This was the strongest sales order growth for Meritage since the second quarter of 2008.

The value of the net orders rose 63% to $385.8 million owing to the order growth and 10% hike in the average prices. Meritage had 151 total active communities at the end of June 2012 compared with 145 active communities at the end of June 2011.

The company’s backlog totaled 1,611 homes as of June 30, 2012, up 62% from 994 homes as of June 30, 2011. The value of backlog grew 75% year-over-year to $457.7 million in the second quarter of 2012, owing to stronger demand and higher prices. Cancellation rate in the quarter also improved to 13% of gross orders versus 15% both in the sequentially preceding quarter and the prior year quarter.

Adjusted home closing gross profit increased to $52.1 million, up 30% year-over-year. The increase in gross profit was driven by higher sales prices and construction overhead leverage. Consequently, the company’s home closing gross margin was 18.5% in second quarter of 2012, up 50 basal points, from the prior-year quarter.

Outlook

The company expects to deliver about 4,043 homes in the fiscal 2012, thus resulting in strong revenue and earnings growth. The company intends to expand its operations to the Southeastern region of U.S. These cities have immense propensity to grow and thus can nurture steady demand for homes in the years to come

We currently have a Neutral recommendation on Meritage Homes Corporation. The stock carries a Zacks #2 Rank (a short-term Buy rating). We appreciate the company’s ability to capitalize on the gradual recovery in the housing market by recording top-line growth and raising prices modestly. However, Meritage Homes still faces tough competition from the resale markets.