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Meritage Homes Banks on Entry-Level Buyers, Lower ASP Hurt

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Meritage Homes Corporation (MTH - Free Report) is riding high on its initiatives to build single-family homes for entry-level and first-time home buyers. Also, the company’s positive  earnings surprise trend and a strong brand presence are commendable.

In first-quarter 2019, the company’s bottom line surpassed the Zacks Consensus Estimate by 3.2%. In fact, the metric topped the consensus mark in 13 of the trailing 14 quarters. The uptrend can be primarily attributed to its solid brand presence and strategies relating to entry-level and first-move-up communities. For 2019 and 2020, earnings estimates have been trending upward over the past 60 days, reflecting optimism surrounding the stock.

Meanwhile, shares of Meritage Homes have gained 39.9% so far this year, outperforming its industry and S&P 500’s 27.1% and 11.2% growth, respectively.



However, rising costs of labor and land along with declining order value and backlog are concerning. Also, lower average sales price or ASP is hurting margins.

Let’s delve deeper into the factors that are supporting its Zacks Rank #3 (Hold) company’s performance.

Major Growth Drivers

Meritage Homes is consistently building homes for entry-level and first-time buyers. Moreover, the company’s LiVE.NOW product addresses the need for lower-priced homes, despite fluctuating interest rates and home prices. In order to address the needs of millennials and baby boomers, this Scottsdale, AZ-based company has undertaken various initiatives, which look promising.

In fact, the company has reduced the ASPs for the homes so that these entry-level/first-time buyers can opt for affordable homes in highly desirable communities. Also, it has started building entry-level and affordable first time move-up communities to meet the increasing the demand for reasonable homes. Notably, in the first quarter of 2019, 36% of total communities and 45% of orders were entry-level compared with 32% and 38%, respectively, in the year-ago period.

Although this latest home-building initiative to lower ASP is definitely going to hurt margins in the near term, it is expected to pay-off in the long run. Meritage Homes is continuously building homes on a speculation basis for ensuring faster delivery at a lower cost, thereby improving margins.

During first-quarter 2019, 67% of total home closings were from spec inventory compared with 51% a year ago.

Concerns

Rising interest expense and lower ASP are major concerns for the company now. In the first quarter, its Homebuilding revenues decreased 5% year over year mainly due to a 4% decline in home closing revenues impacted by 6% reduced ASP.

Moreover, labor shortages and limited land availability hurt margins across all the key regions served by the company, particularly in California. In the first quarter, its land closing revenues were down a significant 32% year over year.

Due to above-mentioned headwinds, the company has issued a tepid guidance. For the second quarter of 2019, Meritage Homes expects home closing revenues within $760-$820 million, below $872.4 million registered in prior-year period. It projects earnings per shares between 95 cents and $1.05 compared with $1.31 per share realized in second-quarter 2018.

For 2019, Meritage Homes anticipates total home closing revenues within $3.25-3.45 billion, down from $3.47 billion recorded in 2018. Earnings are likely to be in the range of $4.65-4.95 per share in 2019, lower than the 2018 reported figure of $5.58 per share.

While the company’s initiative to drive performance by reducing ASP is gaining traction, we wait for better visibility.

Other Key Picks

Some other top-ranked stocks in the same space are NVR, Inc. (NVR - Free Report) , PulteGroup, Inc. (PHM - Free Report) and Taylor Morrison Home Corporation (TMHC - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR, PulteGroup and Taylor Morrison surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 17.6%, 13.5%, and 38.7%, respectively.

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