Meritage Homes Corporation’s (MTH - Free Report) shares have gained 6.2% in the past three months, outperforming the 3% decline of its industry. The overall outlook for the U.S. homebuilding industry remains positive, with a healthy economy and strong job market anticipated to continue driving stocks higher.
Moreover, the Zacks Consensus Estimate for both 2018 and 2019 earnings has increased 6.3% and 1.2%, respectively, in the past 60 days, thus reflecting optimism in the stock’s earnings 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 first-quarter 2018 results, with the company’s earnings and revenues increasing 91.1% and 10.4%, respectively. First-quarter orders were up 8% year over year, as it had been experiencing a robust demand for homes, designed to meet the needs of entry-level buyers. The company ended the quarter with approximately 32% of communities classified as entry-level. The communities drove 38% of its total orders due to higher absorptions. The company intends to achieve 35-40% of its community space in the entry-level market by the end of 2018.
The company remains focused on 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. With its first-quarter absorptions up 12% year over year, the company’s strategy to target the entry-level buyers is gaining traction.
The performance of Meritage Homes continues to improve, given the company’s strong order growth, EPS growth and improving gross margin. Home closing gross margin expanded 90 basis points (bps) in the first quarter, due to better margins in the new communities as well as proficient management of direct costs amid an inflationary environment. Meanwhile, the company also experienced a 30-bps improvement in the SG&A front.
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 2018 and 2019 earnings are expected to increase 38.7% and 8.1% year over year, respectively. In fact, the current year’s expected EPS growth rate is more than the industry’s average projected improvement of 35.5%. In fact, the company has a long-term (three to five years) expected EPS growth rate of 14.1%.
Meanwhile, the company’s sales are expected to increase 11.9% in 2018. For 2019, the company’s sales growth is projected at a healthy 7.2%.
Reasonably Valued Stock: The company currently has a trailing 12-month Price-to-Earnings or P/E ratio of 10.4. This is quite cheap compared with the industry as well as the market at large, as the current P/E of the industry and S&P 500 is pegged at 12.5 and 19.7, 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 1.4x as well as S&P 500’s figure of 3.8x.
Solid Industry Fundamentals: 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 president Trump, along with rising interest rates are expected to create headwinds. 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 13% out of 256 industries) that instills optimism surrounding the housing stocks’ earnings prospects.
Other Stocks to Consider
Other top-ranked stocks in the same space are Century Communities, Inc. (CCS - Free Report) , M.D.C. Holdings, Inc. (MDC - Free Report) and William Lyon Homes (WLH - Free Report) .
Century Communities sports a Zacks Rank #1 and its earnings for the current year are likely to increase 47%.
M.D.C. Holdings is also a Zacks Rank #1 stock and its earnings for the year are expected to grow 27.9%.
William Lyon Homes carries a Zacks Rank #2 and its 2018 earnings are expected to grow 40.7%.
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