Meritage Homes Corp. (MTH Quick QuoteMTH - Free Report) expects to see another strong year in 2022. This Zacks Rank #1 (Strong Buy) is trading at just 4.3x forward earnings because the Street thinks higher mortgage rates are going to hit home buying demand.

Will it?

Meritage Homes is a national home builder which builds first time and move up homes in the hottest housing markets including Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.

Another Beat in Q4

On Jan 27, Meritage reported its fourth quarter 2021 results and beat on the Zacks Consensus by 3.5%. Meritage reported earnings of $6.25 versus the consensus of $6.04.

That's earnings growth of 57% versus the fourth quarter of 2020 where Meritage made just $3.97.

It was the 13th beat in a row. Meritage has only missed once in the last 5 years and it was in 2018.

That's an impressive streak, especially during a pandemic which temporarily closed sales centers in 2020.

But the housing market came roaring back from the start of the pandemic and remains as hot as ever.

In the fourth quarter, entry level made up 79% of community counts and 82% of all orders. Meritage is in the sweet spot of appealing to Millennials, and increasingly, GenZ buyers.

As supply chain issues hit, building times were lengthened. Backlog rose to 5,679 homes from 4,672 last year.

Fourth quarter 2021 was the best fourth quarter ever for sales orders.

It also saw the highest home closing gross profit, up 29% to $434.7 million. Home closing gross margins, a key barometer for the home builders, also jumped 500 basis points to 29% from 24% last year.

For the full-year, gross margins were up 580 basis points to 27.8% from 22% in 2020, a cycle high.

The Strong Demand Continued into 2022

On the conference call Meritage said that it saw the strong demand from 2021 continue into 2022.

The 50 basis point move in the average 30-year fixed mortgage rate over the last few weeks was not deterring home buyers. On the contrary. The possibility of even further rise in mortgage rates has brought out even more buyers.

Promotional incentives remain low as they are still metering some communities and what they release is selling almost immediately in many locations.

2022 Another Year of Growth

The Street has been operating under the assumption that 2021 was "peak" earnings for the home builders. After all, how much hotter could it get?

But the Street has been wrong about underlying demand.

Meritage guided an earnings range of $23.15 to $24.65 for 2022. That's more bullish than the current Zacks Consensus of $23.44.

Here's the earnings outlook for the last 3 years:

2020: $11.00
2021: up 75% to $19.29
2022: analysts expect it to be up 21.5% to $23.44

Analysts are expecting flat growth for 2023, but that's not surprising given all the balls in the air with inflation and possible mortgage rate increases. The analysts are playing it safe on 2023, for now.

Image Source: Zacks Investment Research

Shares Fall 18% to Start 2022

Despite all the good news, investors have still been selling Meritage in 2022.

Shares have been on a wild roller coaster the last 6 months, but have taken a decidedly negative turn in 2022, falling 18% year-to-date.

Image Source: Zacks Investment Research

They are dirt cheap, with a forward P/E of just 4.3.

Meritage doesn't pay a dividend, but it's been using some of its extra free cash flow to buy back shares. In 2021, it bought back 64,000 shares for $61 million.

Meritage expects its higher gross margins to remain intact in 2022. It is forecasting full year of 27.75%.

Is the Street getting the home builders wrong again in 2022?

For those who think the answer is "yes", Meritage is one to keep on your short list.