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Meritage Homes Gains From Entry Level Buyers & Order Growth

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Meritage Homes Corporation’s MTH focus on entry-level, first-time and move-up buyers have been yielding results of late. Also, successful execution of strategic initiatives to boost profitability and LiVE.NOW communities bodes well.

Recently, the company reported fourth-quarter 2019 results, with earnings topping the Zacks Consensus Estimate by 38% and increasing 39% year over year. The upside was backed by solid home closing revenues (up 10.8% year over year), gross margins (up 80 basis points year on year) and greater overhead leverage. It also benefitted from retroactive energy tax credits recorded in 2019.

Shares of this Zacks Rank #1 (Strong Buy) company have surged 66% in a year compared with the industry’s 44.8% rally. The outperformance can be attributed to the company’s impressive earnings surprise trend, having surpassed the Zacks Consensus Estimate in 16 of the trailing 17 quarters. A strong brand presence, innovation and strategies related to entry-level as well as first-move-up communities are expected to drive the stock’s performance in the upcoming quarters as well.

Let delve into the factors that are driving investors’ sentiments and the company’s profitability. You can see the complete list of today’s Zacks #1 Rank stocks here.

Solid Growth Trend & 2020 Outlook: Meritage Homes has a solid trend of generating improved profits. Its earnings surpassed the Zacks Consensus Estimate in 16 of the trailing 17 quarters. The trend is likely to continue in the near term, following strong 2019 results. In 2019, the company’s bottom line increased more than 15% from the year-ago level on the back of successful execution of strategic initiatives.

Again, it is expected to display solid 2020 results as well. The company anticipates 5-10% higher home closings than 2019 level in 2020. Also, it expects home closing gross margin in the mid-19% range, which is above the 2019 level of 18.9%.

Meanwhile, the consensus mark for 2020 earnings is currently pegged at $6.76 per share, which calls for 5.3% year-over-year growth. Notably, Meritage Homes expects to witness 8.9% earnings growth in three-five years.

Strategies to Boost Overall Growth: Meritage Homes is focused on meeting demand for entry-level homes with its LiVE.NOW product. Notably, its LiVE.NOW product addresses the need for lower-priced homes to solve the affordability problems for first-time/entry-level buyers. During 2019, entry-level communities contributed 47% to total communities compared with 33% a year ago.

Also, it continues to witness improvement in profitability, given its strong order growth, EPS growth and rising gross margin. To this end, it is making homes out of speculations that promise faster delivery at lower costs. Also, it reduced the average selling price or ASP for the homes to addresses the needs of millennials and baby boomers, who want affordable homes and highly-desirable communities. In 2019, value of net orders increased 14% from the prior-year period’s levels, despite 4% lower ASP. The company believes that these strategies will continue to boost its future performance.

Strong Housing Fundamentals: The overall homebuilding industry, which includes bigwigs like D.R. Horton, Inc DHI, NVR, Inc (NVR - Free Report) and PulteGroup, Inc PHM, remains positive for 2020 on ongoing traffic trends that indicate higher inclination of buyers. Notably, declining interest/mortgage rates, lower construction costs, low unemployment and increasing wages are somewhat offsetting other ongoing supply-side headwinds. Further, as more millennials are leaving their parents’ home, a sharp hike in household formation is likely to translate into more demand for new homes.

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