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Homebuilding company, Meritage Homes Corporation’s (MTH - Snapshot Report) third quarter 2012 adjusted (for impairments and extinguishment of debt) earnings per share of 43 cents beat the Zacks Consensus Estimate of 33 cents by 30.3% on the back of robust new order growth. The company results also improved significantly from a loss of 10 cents in the prior-year quarter.

Total revenue in the third quarter of 2012 amounted to $342.6 million, up 57.5% year-over-year. Meritage’s home closing revenue was $334.9 million, up 54% from the prior-year quarter. Reported revenue beat the Zacks Consensus Estimate of $342 million. Year-over-year growth in home closing revenue was attributable to a 43% increase in the number of homes closed and an 8% hike in average closing prices, owing to a shift in mix towards higher priced homes and communities.

The company closed 1,197 homes in the third quarter of 2012. Sales growth was highest in California and Arizona. The company has started raising prices in most of its communities with market demand gaining momentum. The average selling prices of the closings stood at $280 million, up 8%.

Net sales orders climbed 33% year over year to 1,204 units during the quarter, reflecting sales order gains across all states.

The boom in net order bookings was attributed to a stabilizing recovery in the housing market. This was backed by lower home prices and moderating interest rates as renting became a more expensive option luring buyers to new homes.

The value of net orders rose 50% to $366.8 million owing to order growth and a 13% hike in average prices. Meritage had 153 total active communities at the end of September 30, 2012 compared with 149 active communities at the end of September 30, 2011.

The company’s backlog totaled 1,618 homes as of September 30, 2012, up 53% from 1,060 homes as of September 30, 2011. The value of backlog grew 70% year over year to $489.5 million in the third quarter of 2012, owing to stronger demand and higher prices. Cancellation rate in the quarter also improved to 13% of gross orders versus 17% in the prior-year quarter.

Adjusted home closing gross profit increased to $62.6 million, up 60.5% 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 18.6% in third quarter of 2012, up 110 basis points from the prior-year quarter.

Outlook

Based on backlog and expected conversion rate of 75%, the company expects to deliver between 4,100 and 4,300 homes in fiscal 2012, thus resulting in strong revenue and earnings growth. The company expects to end fiscal 2012 with approximately 160 communities. The company intends to end fiscal 2013 with 200 communities. The company expects 20% to 30% increase in sales in fiscal 2013.

We are encouraged by the company’s solid third quarter results and bullish growth projection for the upcoming quarters, backed by a gradually recovering homebuilding market. We believe that homebuilders like Meritage and PulteGroup Inc. (PHM - Analyst Report), who have significant land positions, broad geographic and product diversity, and better capital positions, are expected to benefit the most as market conditions recover. However, the housing recovery is uneven and not yet broad based. We would thus prefer to remain on the sidelines until we witness a substantial recovery in the overall housing market.

We currently have a Neutral recommendation on Meritage. The stock carries a Zacks #3 Rank (a short-term Hold rating).

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