Shares of Meritage Homes Corporation (MTH Quick QuoteMTH - Free Report) have appreciated 93.5% in the past year compared with the Zacks Building Products - Home Builders industry’s 78.6% rise. Improved cycle times, spec strategy implementation and strategic efforts resulted in this uptick. The company’s strategy of capitalizing on the solid demand for entry-level and first-move-up homes will likely produce a higher volume in the future.

Furthermore, the Federal Reserve recently opted to keep interest rates stable, providing a sense of reassurance to companies operating in the homebuilding market. In the past 60 days, earnings estimates for this Zacks Rank #3 (Hold) company have witnessed an upward revision of 1.5% to $19.65 per share.

However, the company’s earnings and sales in 2023 are likely to decline 4.5% and 26.5% year over year, respectively. Higher mortgage rates, inflation and macroeconomic risks are headwinds.
 

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Let’s check the factors supporting positive investor sentiments amid ongoing headwinds.

Optimizing Growth Through the Spec Home Strategy

Spec homes, constructed without a prior-buyer lineup, are a key growth driver for Meritage Homes. The strategy focuses on efficient construction and in-demand features, minimizing wait times for buyers. It aims to have a few months’ worth of supply ready for moving in. This ensures comparatively lower wait time for home buyers compared with traditional homebuilding. This approach enables the company to maintain a lower average selling price, boosting demand in comparison to traditional homebuilding.

During the third quarter of 2023, the company’s closings of 3,630 homes were 4% greater than the prior year’s thanks to a shortened cycle time and the commitment to its spec-building strategy.

Focus on First-Time/Entry-Level Buyers Bodes Well

In response to rising interest rates and home prices, the company addresses the demand for affordable homes with its LiVE.NOW product. Emphasizing profitability through strategic initiatives, the company focuses on entry-level LiVE.NOW homes. Consistently building speculative homes for LiVE.NOW communities, the company anticipates meeting the growing demand as millennials express interest in homeownership, leading to higher volumes.

The company believes that its strategy of targeting entry-level and first-move-up buyers is gaining traction and will continue to boost performance over the long haul. Entry-level buyers represented 88% of third-quarter 2023 orders. In the quarter, the cancellation rate was 11%, down from 30% in the year-ago period.

Strategic Efforts to Drive Performance

Despite industry headwinds, the performance of Meritage Homes continues to improve, given strong earnings and revenue growth and improving gross margin. The company's focus on maximizing profits involves building speculative homes for faster, cost-effective delivery. MTH strategically shifts to being a pure-play entry-level and first-move-up builder, expecting higher absorptions with an improving community count growth trajectory.

During the third quarter of 2023, MTH accelerated its investment in internal growth, with $537 million spent on land acquisition and development. The investment was up 41% from the prior year’s levels and 31% sequentially. As of Sep 30, 2023, the total lots controlled were 60,700. For 2023, the company plans to spend more than $2 billion on land acquisition and development, as it expects to grow its community count from 10% to 15% on an annual basis.

Concerns

MTH is highly dependent on housing market demand. Currently, the housing industry remains challenging, given higher mortgage rates and inflationary pressure. Apart from this, labor constraint remains a concern. Although these factors have been stabilizing in recent months, they may dampen Meritage Homes’ operating performance in the future.

However, the Federal Reserve has recently signaled the end of the current rate cycle, maintaining the interest rates at a 22-year high of 5.25-5.5%. The central bank has also indicated three interest rate cuts by the end of 2024. This is a relief for the housing industry as it suggests stability and affordability for potential homebuyers, boosting home sales and supporting overall industry health.

The decline in total backlog is a concern for the company. At the end of third-quarter 2023, the total backlog was 3,608 units, down 41% year over year. The value of the backlog fell 45% year over year to $1.56 billion. The downside was due to the pull-forward of sales last year on expansive rate locks.

Key Picks

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