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Factors Supporting Meritage Homes' (MTH) Resilient 2H21 View

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Meritage Homes Corporation (MTH - Free Report) has been strengthening its position on the back of solid housing industry prospects and the company’s intense focus on entry-level, first-time, and move-up buyers. Impressively, its second-half 2021 prospects also look resilient, despite supply chain disruptions and material, transportation, and labor woes.

Shares of the company have jumped 7.2% against the Zacks Building Products - Home Builders industry’s 4% fall since the beginning of second-half 2021. The stock compares favorably with the Zacks Construction sector’s 0.6% growth and the S&P 500 Index’s 4.6% rally in the same time frame.

The solid uptrend is a testimony to the fact and substantiates its Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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Image Source: Zacks Investment Research

Let’s delve deeper into the factors supporting its growth trajectory.

Solid Housing Prospects to Overcome Supply-Side Headwinds: The overall homebuilding industry looks promising for the second half on ongoing traffic trends that indicate a higher inclination of buyers despite a bit pricier market. Low mortgage rates, declining unemployment rate and the need for more spacious homes are somewhat offsetting supply-side headwinds.

Although the recent builders confidence data, provided by the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), reflect a five-point decline to 75 in August from a month ago, the demographics and interest for home buying remain solid.

NAHB chief economist, Robert Dietz, said, “While these supply-side limitations are holding back the market, our expectation is that production bottlenecks should ease over the coming months and the market should return to more normal conditions.”

In addition to Meritage Homes, industry bigwigs like PulteGroup (PHM - Free Report) , Toll Brothers (TOL - Free Report) and D.R. Horton (DHI - Free Report) remain positive for overall industry growth.

Performance & Growth: Meritage Homes continues to gain from strong order growth, EPS improvement and solid gross margin. To this end, it is making homes out of speculations that promise faster delivery at lower costs. Meritage Homes' entry-level LiVE.NOW product, which accounted for 81% of second-quarter revenues, witnessed high demand. In the first half of 2021, net orders increased 4% in units and 15% in dollars year over year. Ending backlog was also up 25% in units and 41% in dollars year over year.

The Zacks Consensus Estimate for the company’s 2021 earnings indicates a surge of 72.4% from a year ago. On a further encouraging note, the company’s impressive earnings surprise trend — having surpassed the Zacks Consensus Estimate in 22 of the trailing 23 quarters — bodes well.

Strategies to Boost Top-Line Growth: Focus on building homes for entry-level, first-time and move-up buyers has been yielding positive results. Its LiVE.NOW product addresses the need for lower-priced homes to solve affordability problems for first-time/entry-level buyers. Also, strong brand presence, innovation and strategies relating to entry-level/first-move-up communities along with strong housing industry prospects will likely drive the stock’s performance in the upcoming quarters. Backed by these initiatives, home closing revenues for the first half grew 22% year over year.

Superior ROE: Meritage Homes’ return on equity (ROE) is indicative of growth potential. The company’s ROE of 23.2% compares favorably with the industry average of 16.8%, implying that it is efficient in using shareholders’ funds.