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Why Is Meritage (MTH) Up 2.6% 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 2.6% 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 Up on Q2 Earnings Beat, Raises View

Meritage Homes Corporation reported second-quarter 2021 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. Also, the top and bottom lines improved significantly on a year-over-year basis. Total revenues and earnings topped the Zacks Consensus Estimate for the 11th straight quarter.

Steven J. Hilton, executive chairman of Meritage Homes said, “As we get closer to attaining our mid-2022 goal of 300 communities, we exceeded our own expectations and had 226 active communities at June 30, 2021, reflecting an 11% sequential quarterly increase from 203 and, we believe, the start of meaningful growth.”

Earnings & Revenue Discussion

Meritage Homes reported earnings of $4.36 per share, which topped the Zacks Consensus Estimate of $3.45 by 26.4% and surged 83.2% year over year. The upside can be primarily attributed to solid home closing volume, increase in pricing power, expanded gross margin and improved overhead leverage.

Total revenues (including total Closing revenues and Financial Services revenues) amounted to $1.283 billion, up 23.7% from the year-ago level.

Segment Discussion

Total Closing (Homebuilding) Revenues: Total closing revenues of $1.278 billion topped analysts’ expectation by 10.5% and increased 24% from the prior-year quarter, backed by stronger market demand and lower mortgage interest rates. Home closing revenues totaled $1,264.6 million, up 23% year over year. The upside can be attributed to an 18% increase in closings to 3,273 homes, marking the best second quarter of closings in the company’s history. Average sales price (ASP) gained 4% year over year, given persistent strength in housing demand despite a strategic shift toward the entry-level market.

Total home orders decreased 2% from the prior-year level to 3,542 homes due to 10% decline in average communities, partly offset by a 9% rise in absorptions. High demand was witnessed for Meritage's entry-level LiVE.NOW product that accounted for 81% of second-quarter orders compared with 70% in the prior-year quarter.

Meanwhile, value of net orders increased 16% year over year to $1.4999 billion. Quarter-end backlog totaled 5,509 units, up 25% year over year. Value of the backlog also increased 41% year over year to $2.32 billion, with a hike of 12% in ASP.

For the second quarter, home closing gross margin increased 590 basis points (bps) to 27.3% from the year-ago period. The improvement stemmed from higher pricing and fixed cost leverage, given increased closings. Selling, general and administrative expenses — as a percentage of home closing revenues — declined 110 bps year over year to 9.2%.

Land closing revenues amounted to $13 million, up 771% from the year-ago quarter.

Financial Services: The segment’s revenues increased 27% from the prior-year level to $5.7 million.

Balance Sheet

As of Jun 30, 2021, cash and cash equivalents totaled $684.4 million, down from $745.6 million at 2020-end.

Total debt to capital at quarter-end was 30.4% compared with 30.3% at 2020-end. Net debt to capital was 15.4% versus 10.5% on Dec 31, 2020.

2021 Guidance Raised

For 2021, Meritage Homes now expects 12,500-13,000 home closings versus 11,700-12,700 expected earlier. Home closing revenues are now expected in the range of $5-$5.25 billion versus $4.55-$4.85 billion projected before. Also, it projects home closing gross margins to be 27.5% versus 25% of earlier expectation for 2021. Effective tax rate is expected within 22.5-23% versus earlier expectation of 23%.

Meanwhile, 2021 earnings per share are projected in the range of $18.55-$19.45 versus $13.75-$14.75 expected before. The Zacks Consensus Estimate for the same is pegged at $14.7 per share.

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 34.07% due to these changes.

VGM Scores

Currently, Meritage has a poor Growth Score of F, however its Momentum Score is doing a bit better 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 F. 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.


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