Back to top

Image: Bigstock

Meritage Homes (MTH) Surges 39.6% YTD: Will the Momentum Last?

Read MoreHide Full Article

Meritage Homes Corporation (MTH - Free Report) has been riding high, given its focus on first-time/entry-level buyers and a strong balance sheet. Additionally, the lack of existing homes for sale and more stabilized mortgage rates have been boosting the confidence of homebuilders. Also, lumber prices have been declining since March 2023, helping homebuilders drive margins to some extent.

Shares of Meritage Homes, a Scottsdale, AZ, homebuilder, have gained 39.6% this year so far, outperforming the Zacks Building Products - Home Builders industry’s 31.5% rise. In fact, the stock has fared better than the Zacks Construction sector and the S&P 500 Index’s 16.2% and 12.5% rallies, respectively.

The solid price performance was backed by the abovementioned factors and an impressive earnings surprise history. The company’s earnings surpassed the Zacks Consensus Estimate in the trailing 14 quarters. Total closing revenues also surpassed the consensus mark in 12 out of the trailing 14 quarters. The growth was backed by stabilizing housing demand as interest rates dipped slightly.

Zacks Investment Research
Image Source: Zacks Investment Research

The 2023 earnings estimates for this Zacks Rank #2 (Buy) company have moved 3.4% upward over the past 30 days. This positive trend signifies bullish analysts’ sentiments, indicating robust fundamentals and the expectation of outperformance in the near term.

Again, it carries an impressive VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum.

Let’s delve deeper into the major driving factors.

Affordable Homes: Meritage Homes remains focused on the growing demand for entry-level homes with its LiVE.NOW product that addresses the need for lower-priced homes, given the rising interest rates and home prices. The successful execution of strategic initiatives to boost profitability, along with the focus on entry-level LiVE.NOW homes boosted the upside. Meritage Homes is continuously building homes on a spec basis for LiVE.NOW. communities. Since millennials are now showing a tendency to set up homes, demand is likely to pick up, which will lead to higher volumes.

Entry-level buyers comprised 84% of first-quarter 2023 closings and more than 87% of orders in the first quarter of 2023 (up from 83% of orders in first-quarter 2022).

Improving Builders’ Sentiment: Builders are now cautiously optimistic for 2023 as the lack of existing inventory is shifting demand to the new home market. Builder confidence in the market for newly-built single-family homes in May inched up five points to 50, according to the National Association of Home Builders /Wells Fargo Housing Market Index. This is the fifth straight month in which builder confidence has increased and is the first time sentiment levels have reached the midpoint mark of 50 since July 2022.

Higher Return on Equity (ROE): The company’s trailing 12-month ROE is 24%, higher than the industry’s 21.4%. This implies that the company is getting more efficient at creating profits and increasing shareholders’ value with respect to its industry.

Stable Financial Condition: Meritage Homes has ample liquidity and a healthy balance sheet to manage through this changing environment. At the end of first-quarter 2023, cash and cash equivalents totaled $957.2 million, up from $861.6 million on Dec 31, 2022. The company issued $49.5 million worth of outstanding letters of credit under the credit facility during the quarter, with availability being $730.5 million. The company does not have any significant debt maturity until 2025.

Net debt was $193.5 million as of Mar 31, 2023, down from $289.1 million reported at 2022-end. Total debt to capital at first-quarter 2023-end was 22.1%, down from 22.6% at 2022-end.

Other Top-Ranked Stocks From the Construction Sector

Beazer Homes USA (BZH - Free Report) designs, constructs, and sells single-family and multi-family homes under the Beazer Homes, Gatherings, and Choice Plans names.

BZH currently sports a Zacks Rank #1 (Strong Buy). Its shares have gained 76.5% this year so far. BZH’s 2023 earnings per share have increased to $3.95 per share from $3.56 over the past 60 days, respectively. Again, it carries an impressive VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

PulteGroup Inc. (PHM - Free Report) has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes.

PulteGroup, presently flaunts a Zacks Rank #1, has jumped 58.5% year to date. The Zacks Consensus Estimate for its 2023 and 2024 earnings has been upwardly revised by 4% and 4.4%, respectively, over the past 30 days. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.6%. Again, it carries an impressive VGM Score of A.

NVR Inc.’s (NVR - Free Report) lot acquisition strategy helps the company to avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers.

NVR, currently sports a Zacks Rank #1, has gained 25.6% this year. NVR has seen an upward estimate revision for 2023 over the past 30 days by 1.7%.

Published in