It has been about a month since the last earnings report for Meritage Homes (MTH Quick QuoteMTH - Free Report) . Shares have added about 14% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Meritage Homes Q2 Earnings Top Estimates

Meritage Homes Corporation reported impressive results for second-quarter 2020. Earnings and homebuilding revenues surpassed the respective Zacks Consensus Estimate, as well as improved significantly on a year-over-year basis.

Encouragingly, May and June marked the two highest selling months in the company’s history. Also, orders were an all-time high in the company’s record.

Earnings & Revenue Discussion

Meritage Homes reported earnings of $2.38 per share, which topped the Zacks Consensus Estimate of $1.52 by an impressive 56.6% and increased a whopping 82% year over year. The uptrend was due to solid home closing revenues, the highest gross margin in the past six years and overhead leverage.

Total revenues (including Homebuilding and Financial Services revenues) amounted to $1.04 billion, up 19.4% from the year-ago level backed by stronger market demand, given historically low mortgage interest rates and a shortage of used homes for sale.

Segment Discussion

Homebuilding: Revenues in the segment totaled $1,033 million, up 19% from the prior-year level of $864.6 million. The metric also topped the consensus estimate of $891 million by 16%. Home closing revenues totaled $1,031.6 million, up 20% year over year. The upside can be attributed to a 23% increase in volumes. Average sales price or ASP fell 3% year over year due to strategic shift to the higher-demand entry-level market.

During the quarter, the company reported homes closed of 2,770 units, up 23% year over year. Total home orders increased 32% from the prior year to 3,597 homes, backed by a 42% increase in absorptions. During May and June, it reported 44% and 66% year-over-year growth, respectively. Arizona and Texas generated the highest absorptions in the quarter.

Entry-level buyers contributed 70% to total order growth and represented 57% of total active communities compared with 51% and 41% in the year-ago period, respectively. First move-up buyers made up one-third of communities and 26% of quarterly orders.

Despite 6% lower ASP, value of net orders increased 24% year over year to $1.3 billion. Order cancellations came in at 15%, up from 12% in the prior year. Quarter-end backlog totaled 4,395 units, up 19% year over year. Value of the backlog also increased 12% year over year despite a 7% decrease in ASP.

During the quarter, home closing gross margin increased 300 basis points (bps) to 21.4%. This improvement stemmed from strategic streamlining of operations, certain temporary cost concessions and leverage from increased closings, partially offset by $3.3 million contract termination walk-away charges. Selling, general and administrative expenses — as a percentage of home closing revenues — decreased 70 bps from the prior year.

Land closing revenues amounted to $1.5 million, down 4% from $1.56 million in the year-ago quarter.

Financial Services: The segment’s revenues increased 8% from the prior-year level to $4.48 million.

Balance Sheet

As of Jun 30, 2020, cash and cash equivalents totaled $484.6 million compared with $319.5 million on Dec 31, 2019. Notably, the company repaid $500 million of borrowings made under the $780-million revolving credit facility during the quarter.

At quarter-end, the company had 42,900 total lots owned or under control compared with 34,700 at second-quarter 2019-end.

Total debt to capital at the end of the quarter was 32.8% compared with 34% at 2019-end. Net debt to capital declined to 20.4% from 26.2% on Dec 31, 2019. The company has suspended repurchase of stocks for an indefinite period.

Guidance

Based on the current market scenario, Meritage Homes believes that it can generate $4-4.3 billion home closing revenues in 2020, including $1-1.1 billion in the third quarter. Also, it expects home closing gross margins to be around 21% for the third quarter and 2020. It projects earnings within $8.75-9.25 per share for 2020 and $2.15-2.35 for the third quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 61.02% due to these changes.

VGM Scores

At this time, Meritage has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Meritage has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.