Shares of Meritage Homes Corporation (MTH - Free Report) have gained more than 14% in the last six months, outperforming the 13.2% growth of its industry. The overall outlook for the U.S homebuilding industry remains positive, with healthy economy and strong job market expected to continue to drive stocks higher.
Moreover, the Zacks Consensus Estimate for earnings for both the first quarter and the current year has increased 10.4% and 8.6%, respectively, in the last 60 days, thus reflecting optimism in the stock’s prospects and substantiating its Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What Makes Meritage Homes a Solid Pick?
Stellar Performance: Last month, Meritage Homes came up with robust quarterly results, with the company’s earnings and revenues increasing 9.8% and 7.5%, respectively. Fourth-quarter orders were up 20% year over year, as it had been experiencing robust demand for homes, designed to meet the needs of entry-level buyers. They made up nearly 33% of its total 2017 orders, compared with approximately 24% in 2016.
Even in 2017, the company’s revenues improved 7% that resulted from 5% increase in home closings and 1% increase in average closing prices over 2016. The performance of Meritage Homes continues to improve, given the company’s strong order growth, EPS beat and improving gross margin. Home closing gross margin expanded 30 basis points in the fourth quarter of 2017 due to better margins in new communities as well as proficient management of direct costs in an inflationary environment.
The company’s strategic shift to entry level is expected to yield higher absorptions, further aided by an improving community count growth trajectory in 2018.
Solid Estimated EPS Growth: The company’s first-quarter earnings are expected to increase 32.1% year over year. The company’s EPS is expected to grow 30.4% for the current year, almost in line with the industry’s average projected growth.
In 2019, Meritage Homes is expected to deliver a solid performance, wherein its bottom line is expected to grow 13.3%.
Meanwhile, the company’s sales are expected to increase 5.2% in the current quarter and 10% for the current year. For 2019, the company’s projected sales growth is a healthy 8.2%.
Reasonably Valued Stock: The company currently has a trailing 12-month Price-to-Earnings or P/E ratio of 11.9. This is quite cheap compared with the industry as well as the market at large, as the current P/E for the industry and S&P 500 is at 14.5 and 21.5, respectively. Its lower-than-market positioning calls for an upside in the quarters ahead.
Again, the company’s trailing 12-month Price-to-Book or P/B ratio of 1.2 is lower than the industry’s 1.7x as well as S&P 500’s 3.6x.
Solid Industry Fundamental: The housing/homebuilding industry has been riding high on steady job and wage growth, and rapidly increasing household formation. There’s no denying that the steel and aluminum tariffs, announced by the President Trump, are expected to raise construction costs. That said, the overall outlook for the residential construction industry remains positive with a healthy economy and strong job market that will continue to drive stocks higher. The positive momentum is evident from the robust Zacks Industry Rank (Top 41% out of 256 industries).
Housing starts hit their highest level in more than a year in January 2018, after the sector recovered from a decline in December due to poor weather. Building permits, which are a reliable indicator of future demand, also increased favorably. Overall, the monthly new residential construction report indicates that the industry is in fine fettle and has a strong year ahead.
Other Stocks to Consider
Other top-ranked stocks worth considering in the same space are Boise Cascade Company (BCC - Free Report) , Beazer Homes USA, Inc. (BZH - Free Report) and William Lyon Homes (WLH - Free Report) .
Boise Cascade sports a Zacks Rank #1 and is likely to witness a rise of 36.7% in earnings for the current year.
Beazer Homes, a Zacks Rank #2 stock, is expected to witness 112.5% growth in earnings this quarter.
William Lyon, also a Zacks Rank #2 stock, is expected to witness 38% growth in 2018 earnings.
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