Meritage Homes Corporation (MTH - Free Report) has been benefiting from its focus on entry-level, first-time and move-up buyers. Also, successful execution of strategic initiatives to boost profitability and LiVE.NOW communities bodes well.
Shares of this Scottsdale, AZ-based single-family homebuilder have returned 42.1% over a month, steadily outperforming the Zacks Building Products - Home Builders industry’s 13.8% rally. Also, it has outperformed the S&P 500’s 2% rise in the said period. The solid performance can be attributed to an impressive earnings surprise trend. Meritage Homes’ earnings surpassed the Zacks Consensus Estimate in 17 of the trailing 18 quarters. The trend is likely to continue in the near term as well, thanks to its robust first-quarter 2020 results.
Although the company’s home orders for March declined sharply due to weakening business conditions stemming from the coronavirus pandemic across the United States, its sales momentum increased during the last two weeks of April, stretching into May. It remains optimistic that the company’s May orders might match the year-ago level.
However, record job losses, and fear and uncertainty regarding the future as a result of COVID-19 are concerns for homebuilders like Meritage Homes, PulteGroup Inc. (PHM - Free Report) , NVR, Inc. (NVR - Free Report) , D.R. Horton, Inc. (DHI - Free Report) and others.
Let’s delve deeper into the factors that justify its current Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Focus on First-Time/Entry-Level Buyers: Meritage Homes remains focused on growing demand for entry-level homes with the LiVE.NOW product that addresses the need for lower-priced homes, given affordability concerns. The company believes that the strategy of targeting entry-level and first move-up buyers is gaining traction and will continue to boost performance over the long haul. It reported 23% year-over-year growth in total orders in the first quarter, primarily backed by a 35% improvement in absorptions, which was driven by higher demand for entry-level homes. In fact, entry-level orders contributed 61% to total order growth compared with 45% in the year-ago period. Also, the same represented 51% of total active communities at the quarter-end compared with 36% a year ago.
Initiatives to Drive Growth: The performance of Meritage Homes continues to improve, given strong order growth, EPS improvement and improving gross margin. The company is particularly focused on increasing gross margin and maximizing profits on every sale. To this end, it is making homes out of speculations that promise faster delivery at a lower cost. Meritage Homes’ strategic shift to a pure-play entry-level and first-move-up builder is expected to yield higher absorptions, aided by an improving community count growth trajectory.
Superior ROE: Meritage Homes’ return on equity (ROE) is indicative of growth potential. The company’s ROE of 15.5% compares favorably with the industry average of 12.7%, implying that it is efficient in using shareholders’ funds.
Coronavirus to Weigh on Results: Given uncertainties arising from the coronavirus outbreak, the company experienced slowed absorption and higher cancellations since mid-March through mid-April, as the state and local government authorities implemented various restrictions and stay-in-place orders to restrict the spread of the virus. Uncertainties in business operations arising from the COVID-19 outbreak prompted Meritage Homes to withdraw its previously issued 2020 guidance. It expects weak results in the near term as large parts of the economy have been hurt by the spread of the coronavirus.
Precisely, a significant rise in unemployment — particularly arising from coronavirus-led shutdowns and stay-at-home orders — is a major headwind. The recent Bureau of Labor Statistics Job Openings and Labor Turnover Survey data reveals that there were 618,000 layoffs in the construction sector in March. The metric was strikingly higher than 202,000 in February and 179,000 in March 2019. Notably, it expects the metric to be higher in the April data, scheduled to be released on Jun 9.
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