It has been about a month since the last earnings report for Meritage Homes (MTH Quick QuoteMTH - Free Report) . Shares have lost about 8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Meritage due for a breakout? 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 drivers.

Meritage Homes Q4 Earnings Beat, Orders & Backlog Fall

Meritage Homes Corporation reported impressive results for fourth-quarter 2022, where earnings and total closing revenues surpassed the Zacks Consensus Estimate. The metrics also rose from the year-ago quarter’s levels, thanks to higher volumes and pricing.

Phillippe Lord, the CEO of MTH, said, "Although favorable demographics and the low supply of new and resale housing inventory should drive long-term demand, we believe they were overshadowed by the macroeconomic factors that drove the slower orders this quarter. Looking into 2023, we are starting the new year on the right foot. We believe we have the right level of completed and near-completed homes to sell in nearly all of our stores and we are working to find the market clearing price to get back to our target absorption pace of 3-4 net sales per month. As our strategy is centered on affordable, move-in ready product, we believe we can continue to capture market share over the coming year."

Earnings & Revenue Discussion

Earnings of $7.09 per share topped the Zacks Consensus Estimate of $7.03 by 0.9% and increased by 13% year over year from $6.25 posted a year ago. The uptrend was due to higher home closing revenue, improved overhead leverage and a lower outstanding share count.

Total revenues (including Homebuilding and Financial Services revenues) amounted to $2 billion, up 32.9% from the year-ago quarter’s levels.

Segment Discussion

Homebuilding: Total closing revenues totaled $1,991.4 million, up 33% from the prior-year quarter’s level of $1,498.8 million. The metric lagged the consensus mark of $1,952 million by 2%. Home closing revenues totaled $1,984.1 million, up 32% from the prior-year quarter’s level of $1,498.8 million. The upside can be attributed to a 3% increase in average sales price or ASP and higher closing volumes.

MTH reported 4,540 units of homes closed, up by 29% year over year. Total home orders declined 46% from the prior year to 1,808 homes. In dollars, home orders fell 52% year over year to $703.7 million on a 10% lower ASP. The decline was due to a 39% cancellation rate, resulting in a 51% decrease in average absorptions per store to 2.2 per month from 4.5 per month a year ago. The average community count increased 10.3% year over year to 273 homes. Gross sales orders declined 22% year over year to 2,979 homes.

Entry-level buyers represented 89% of sales order compared with 82% in the year-ago quarter.

Quarter-end backlog totaled 3,332 units, down 41% year over year. The value of the backlog also decreased by 39% year over year to $1.52 billion.

Adjusted home closing gross margin contracted by 350 basis points (bps) to 25.7%. Selling, general and administrative expenses — as a percentage of home closing revenues — improved 10 bps to 8.4% from the prior-year quarter’s levels. The uptrend was mainly driven by the continued leverage of fixed costs on higher home closing revenues.

Land closing revenues amounted to $7.33 million, up from $0.012 million in the year-ago quarter.

Financial Services: The segment’s revenues rose 32% from the prior-year quarter’s level to $7.36 million.

2022 Highlights

Total closing revenues for 2022 came in at $6.21 billion, up 22% from the 2021 level on 10% higher home closing volume and an 11% higher ASP resulting from a favorable pricing environment. Earnings of $26.74 per share rose 39% year over year.

Total home orders of 11,759 homes in 2022 were lower than the 13,808 reported in 2021. Home order value also declined 9% from 2021.

For 2022, home closing gross margin improved 100 bps to 28.9% compared with 27.9% in 2021. SG&A expenses (as a percentage of home closing revenues) improved 90 bps to 8.3% compared with 9.2% in 2021.

Balance Sheet

At the end of 2022, cash and cash equivalents totaled $861.6 million compared with $618.3 million on Dec 31, 2021. At 2022-end, 63,000 lots were owned or controlled by the company compared with 75,000 lots a year ago.

Total debt to capital at 2022-end was 22.6% compared with 27.6% at 2021-end. Net debt to capital was 6.8% versus 15.1% on Dec 31, 2021. MTH repurchased 1,166,040 shares of its common stock for $109.3 million during 2022. As of Dec 31, 2022, $244.1 million shares remained under the authorized share repurchase program.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Meritage has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Meritage has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.