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Is Meritage Homes a Better Housing Stock Than Taylor Morrison?

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Despite being hurt by insufficient inventory, the U.S. homebuilding industry is well poised to meet housing demand in 2020. Historically-low mortgage rates, moderate home prices, Fed’s dovish stance, rising wages and lower unemployment level are adding to the bliss.

Altogether, economists are expecting home-building activity to gain steam this year. The latest home sales data — new, existing or pending — signaled the positives surrounding the industry. All these metrics were up year over year in November 2019. Notable homebuilders like Meritage Homes Corporation (MTH - Free Report) , Taylor Morrison Home Corporation (TMHC - Free Report) , PulteGroup, Inc. (PHM - Free Report) and D.R. Horton, Inc. (DHI - Free Report) remain positive, as these have been experiencing steady demand for single-family homes.

Among the industry bellwethers, let’s check out whether Meritage Homes or Taylor Morrison is a more profitable pick for investors right now. Notably, both the companies are almost neck to neck in terms of market cap and carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s delve deeper into both the company’s growth and profitability measures.

What Defines the Stocks?

Meritage Homes — having a market cap of $2.37 billion — engages in building and selling single-family homes for entry-level, first-time and move-up buyers in historically high-growth regions of the United States. The company’s successful execution of strategic initiatives to boost profitability and focus on entry-level LiVE.NOW homes — which address the need for lower-priced homes — is expected to yield higher absorptions, aided by an improving community count growth trajectory.

Conversely, Taylor Morrison — with a market cap of $2.33 billion — offers a diverse assortment of homes across a wide range of price points for entry-level, move-up, luxury and active adult buyers. The company designs, builds and sells single and multi-family attached and detached homes. Notably, it operates under Taylor Morrison and Darling Homes brands. The company has been benefiting from buyouts, strategic initiatives to boost profitability and building homes on a spec basis. Not only its customer-centric approach is encouraging, but also investment in land acquisition should drive growth.

Stock Performance

Shares of Meritage Homes and Taylor Morrison have gained 53.8% and 22.4% in the past year, respectively, compared with the industry 36.9% rally. Hence, when compared with the industry’s collective performance, Meritage Homes fares better than Taylor Morrison.



Growth Prospects & Surprise History

Analysts expect Meritage Homes’ earnings to grow 19.1% year over year in 2020. Taylor Morrison’s bottom line for the year is likely to rise 13.5%. Meanwhile, considering a more comprehensive earnings history, Meritage Homes delivered a positive surprise in 15 of the last 16 quarters, while Taylor Morrison came up with positive surprises in 13 of the trailing 16 quarters.

Hence, Meritage Homes is a clear winner in terms of earnings growth expectation and surprise history.

Profitability and Returns

Return on Capital of Meritage Homes is 7.2%, while that of Taylor Morrison and the industry is 6.6% and 8.9%, respectively.

Return on Equity in the trailing 12 months for Meritage Homes is 12.4%, while that of Taylor Morrison is 12.5%. Markedly, both the companies provide lower returns to investors compared with the industry’s 13.8%.

A Look at the Stocks’ Valuation

The trailing 12-month price-to-earnings (P/E) multiple for Meritage Homes and Taylor Morrison is 10.92 and 8.09, respectively, compared with 10.82 of its industry. Meritage Homes’ shares are costlier than Taylor Morrison and the industry.

Trailing 12-month price-to-sales (P/S) for Meritage Homes and Taylor Morrison is 0.62 and 0.47, respectively, compared with the industry’s 0.96.

After having a look at these valuation metrics, we can say that Taylor Morrison is the cheaper of the two stocks.

Our Take

With the help of the above-mentioned factors, we can come to the conclusion that Meritage Homes certainly has an edge over Taylor Morrison in terms of earnings growth, stock performance and surprise history.

Going forward, both the companies remain optimistic about the overall homebuilding growth trend, given solid demand for homes, favorable job market and strength in economic fundamentals, offsetting supply-side woes.

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