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Why Is Meritage (MTH) Down 0.2% Since Last Earnings Report?
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It has been about a month since the last earnings report for Meritage Homes (MTH - Free Report) . Shares have lost about 0.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Meritage due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Meritage Homes Q2 Earnings & Revenues Top, '24 View Up
Meritage Homes Corporation reported impressive second-quarter 2024 results, wherein the earnings and total closing revenues topped the Zacks Consensus Estimate and grew year over year.
The quarterly results were backed by resilient housing demand and the company’s progress in delivering quick-turning and affordable move-in-ready homes. The current backdrop of underbuilt supply of homes in the market has been acting as a catalyst in fueling the demand for newly built homes, thus increasing order volumes. Furthermore, the company’s efficient capital management initiatives have added to the uptrend, since it invested $631 million in land acquisition and development and brought in more than 8,700 net new lots under control during the quarter.
Despite the ongoing mortgage interest rate volatility in the market, MTH was able to achieve record second-quarter home closings thanks to the aforementioned tailwinds. Also, the positive factors aided it in achieving a backlog conversion rate of 136% and a return on equity of 18.3% during the quarter. Owing to the improving trend, the company raised its home closing revenues and earnings per share outlook for 2024.
Earnings & Revenue Discussion
Earnings per share (EPS) of $6.31 topped the Zacks Consensus Estimate by 22.1%. The reported figure increased 26% from the year-ago quarter’s reported EPS of $5.02.
Total revenues (including Homebuilding and Financial Services revenues) amounted to $1.7 billion, up 8.3% from $1.57 billion reported in the year-ago period.
Segment Discussion
Homebuilding: Total closing revenues were $1.69 billion, which grew 7.6% from the prior-year quarter’s level of $1.57 billion and surpassed the consensus mark of $1.57 billion by 7.5%.
Under the Homebuilding umbrella, home closing revenues of $1.69 billion grew 10% from the prior-year quarter’s level of $1.54 billion.
Meritage Homes reported 4,118 units of homes closed, up 18% from 3,490 units in the year-ago quarter. The average sales price (“ASP”) of homes closing declined 7% from a year ago to $411,000 due to product and geographic mix. Our model’s estimate for the metric was 3,701 units for an ASP of $415,790.
Total home orders rose 14% from the prior year to 3,799 homes. In dollars, home orders increased 7% year over year to $1.57 billion. A 6% lower ASP of $414,000 due to both geographic and product mix shifts impacted growth to some extent. We estimated home orders to be up 22.1% year over year. The average absorption pace was 4.5 per month, up 15% from 3.9 in the prior year. The average community count declined 1.4% year over year but grew 4% sequentially to 287.
Entry-level buyers represented 92% of sales orders compared with 85% in the year-ago period.
The quarter-end backlog totaled 2,714 units, down 28% year over year. The value of the backlog also decreased 34% year over year to $1.11 billion.
Adjusted home closing gross margin expanded 150 basis points (bps) to 24.4%, driven by lower direct costs, greater leverage of fixed costs and shorter construction cycle times, partially offset by higher lot costs. Selling, general and administrative expenses — as a percentage of home closing revenues — contracted 30 bps from the prior-year quarter to 9.3% primarily because of leverage achieved on higher home closing revenues.
Financial Services: The segment’s revenues rose 33.8% from the prior-year quarter’s level to $8.31 million.
Balance Sheet
At the end of the second quarter, cash and cash equivalents totaled $992.9 million, up from $921.2 million reported at the end of Dec 31, 2023. At the end of Jun 30, 2024, approximately 71,000 lots were owned or controlled by the company compared with about 60,000 lots a year ago.
Total debt to capital was 21.2% compared with 17.9% in 2023-end. Net debt to capital was 6.2% compared with 1.9% at Dec 31, 2023.
At the end of the six months ended Jun 30, 2024, net cash used by operating activities was $36 million against $355.9 million of net cash provided by operating activities a year ago.
During the quarter, Meritage Homes paid quarterly cash dividends of 75 cents per share totaling $27.2 million to its shareholders. There were no share repurchases during the quarter due to the customary lock-out restrictions associated with the 2028 Convertible Notes issuance. As of Jun 30, 2024, $129.1 million in shares remained under the authorized share repurchase program.
Raised 2024 Outlook
Meritage Homes now expects 14,750-15,500 home closings for the year, up from the prior expected range of 14,500-15,000 home closings. The closings are now likely to generate revenues between $6.1 billion and $6.3 billion, which are up from the priorly expected range of $6-$6.2 billion.
Home closing gross margin is still expected to be in the 24.5-25% range compared with 24.9% in 2023.
The EPS for the year is now expected to be between $19.80 and $21.00, up from the previously expected range of $19.20-$20.70.
The company still expects an effective tax rate of approximately 22.5%.
Q3 Guidance
Meritage Homes expects 3,650-3,850 home closings for the quarter. The closings are likely to generate revenues between $1.5 billion and $1.6 billion. Home closing gross margin is expected to be in the 23.5-24% range. The EPS for the quarter is now expected to be between $4.60 and $5.05. The company expects an effective tax rate of approximately 22.5%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
VGM Scores
At this time, Meritage has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Meritage has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Meritage is part of the Zacks Building Products - Home Builders industry. Over the past month, D.R. Horton (DHI - Free Report) , a stock from the same industry, has gained 7.6%. The company reported its results for the quarter ended June 2024 more than a month ago.
D.R. Horton reported revenues of $9.97 billion in the last reported quarter, representing a year-over-year change of +2.5%. EPS of $4.10 for the same period compares with $3.90 a year ago.
For the current quarter, D.R. Horton is expected to post earnings of $4.14 per share, indicating a change of -7% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.4% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for D.R. Horton. Also, the stock has a VGM Score of D.
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Why Is Meritage (MTH) Down 0.2% Since Last Earnings Report?
It has been about a month since the last earnings report for Meritage Homes (MTH - Free Report) . Shares have lost about 0.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Meritage due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Meritage Homes Q2 Earnings & Revenues Top, '24 View Up
Meritage Homes Corporation reported impressive second-quarter 2024 results, wherein the earnings and total closing revenues topped the Zacks Consensus Estimate and grew year over year.
The quarterly results were backed by resilient housing demand and the company’s progress in delivering quick-turning and affordable move-in-ready homes. The current backdrop of underbuilt supply of homes in the market has been acting as a catalyst in fueling the demand for newly built homes, thus increasing order volumes. Furthermore, the company’s efficient capital management initiatives have added to the uptrend, since it invested $631 million in land acquisition and development and brought in more than 8,700 net new lots under control during the quarter.
Despite the ongoing mortgage interest rate volatility in the market, MTH was able to achieve record second-quarter home closings thanks to the aforementioned tailwinds. Also, the positive factors aided it in achieving a backlog conversion rate of 136% and a return on equity of 18.3% during the quarter. Owing to the improving trend, the company raised its home closing revenues and earnings per share outlook for 2024.
Earnings & Revenue Discussion
Earnings per share (EPS) of $6.31 topped the Zacks Consensus Estimate by 22.1%. The reported figure increased 26% from the year-ago quarter’s reported EPS of $5.02.
Total revenues (including Homebuilding and Financial Services revenues) amounted to $1.7 billion, up 8.3% from $1.57 billion reported in the year-ago period.
Segment Discussion
Homebuilding: Total closing revenues were $1.69 billion, which grew 7.6% from the prior-year quarter’s level of $1.57 billion and surpassed the consensus mark of $1.57 billion by 7.5%.
Under the Homebuilding umbrella, home closing revenues of $1.69 billion grew 10% from the prior-year quarter’s level of $1.54 billion.
Meritage Homes reported 4,118 units of homes closed, up 18% from 3,490 units in the year-ago quarter. The average sales price (“ASP”) of homes closing declined 7% from a year ago to $411,000 due to product and geographic mix. Our model’s estimate for the metric was 3,701 units for an ASP of $415,790.
Total home orders rose 14% from the prior year to 3,799 homes. In dollars, home orders increased 7% year over year to $1.57 billion. A 6% lower ASP of $414,000 due to both geographic and product mix shifts impacted growth to some extent. We estimated home orders to be up 22.1% year over year. The average absorption pace was 4.5 per month, up 15% from 3.9 in the prior year. The average community count declined 1.4% year over year but grew 4% sequentially to 287.
Entry-level buyers represented 92% of sales orders compared with 85% in the year-ago period.
The quarter-end backlog totaled 2,714 units, down 28% year over year. The value of the backlog also decreased 34% year over year to $1.11 billion.
Adjusted home closing gross margin expanded 150 basis points (bps) to 24.4%, driven by lower direct costs, greater leverage of fixed costs and shorter construction cycle times, partially offset by higher lot costs. Selling, general and administrative expenses — as a percentage of home closing revenues — contracted 30 bps from the prior-year quarter to 9.3% primarily because of leverage achieved on higher home closing revenues.
Financial Services: The segment’s revenues rose 33.8% from the prior-year quarter’s level to $8.31 million.
Balance Sheet
At the end of the second quarter, cash and cash equivalents totaled $992.9 million, up from $921.2 million reported at the end of Dec 31, 2023. At the end of Jun 30, 2024, approximately 71,000 lots were owned or controlled by the company compared with about 60,000 lots a year ago.
Total debt to capital was 21.2% compared with 17.9% in 2023-end. Net debt to capital was 6.2% compared with 1.9% at Dec 31, 2023.
At the end of the six months ended Jun 30, 2024, net cash used by operating activities was $36 million against $355.9 million of net cash provided by operating activities a year ago.
During the quarter, Meritage Homes paid quarterly cash dividends of 75 cents per share totaling $27.2 million to its shareholders. There were no share repurchases during the quarter due to the customary lock-out restrictions associated with the 2028 Convertible Notes issuance. As of Jun 30, 2024, $129.1 million in shares remained under the authorized share repurchase program.
Raised 2024 Outlook
Meritage Homes now expects 14,750-15,500 home closings for the year, up from the prior expected range of 14,500-15,000 home closings. The closings are now likely to generate revenues between $6.1 billion and $6.3 billion, which are up from the priorly expected range of $6-$6.2 billion.
Home closing gross margin is still expected to be in the 24.5-25% range compared with 24.9% in 2023.
The EPS for the year is now expected to be between $19.80 and $21.00, up from the previously expected range of $19.20-$20.70.
The company still expects an effective tax rate of approximately 22.5%.
Q3 Guidance
Meritage Homes expects 3,650-3,850 home closings for the quarter. The closings are likely to generate revenues between $1.5 billion and $1.6 billion. Home closing gross margin is expected to be in the 23.5-24% range. The EPS for the quarter is now expected to be between $4.60 and $5.05. The company expects an effective tax rate of approximately 22.5%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
VGM Scores
At this time, Meritage has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Meritage has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Meritage is part of the Zacks Building Products - Home Builders industry. Over the past month, D.R. Horton (DHI - Free Report) , a stock from the same industry, has gained 7.6%. The company reported its results for the quarter ended June 2024 more than a month ago.
D.R. Horton reported revenues of $9.97 billion in the last reported quarter, representing a year-over-year change of +2.5%. EPS of $4.10 for the same period compares with $3.90 a year ago.
For the current quarter, D.R. Horton is expected to post earnings of $4.14 per share, indicating a change of -7% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.4% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for D.R. Horton. Also, the stock has a VGM Score of D.