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Meritage (MTH) Down 2.5% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Meritage Homes (MTH). Shares have lost about 2.5% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Meritage Homes Q1 Earnings Beat, Margins Fall Y/Y

Meritage Homes reported better-than-expected results for first-quarter 2023. Both earnings and total closing revenues surpassed the Zacks Consensus Estimate.

The metrics, however, declined from the year-ago quarter’s levels, thanks to ongoing macroeconomic woes.

Phillippe Lord, the CEO of MTH, said, "We believe our focus on pace over price and commitment to our spec inventory position us well to capitalize on buyer demand and continue to gain market share. We expect the undersupply of new and resale home inventory as well as favorable demographics provide a strong long-term runway for the homebuying market."

Earnings & Revenue Discussion

Earnings of $3.54 per share topped the Zacks Consensus Estimate of $2.51 by 41% but declined 39% year over year from $5.79 posted a year ago. Lower gross margin and overhead leverage hurt the bottom line.

Total revenues (including Homebuilding and Financial Services revenues) amounted to $1.285 billion compared with $1.29 billion reported in the year-ago period.

Segment Discussion

Homebuilding: Total closing revenues totaled $1,279.3 million, slipping 0.6% from the prior-year quarter’s level of $1,286.9 million. The metric beat the consensus mark of $1,012 million by 26.4%. Home closing revenues totaled $1,261.9 million, up 1.3% from the prior-year quarter’s level of $1,245.5 million. This was backed by stabilizing housing demand as interest rates dipped slightly.

MTH reported 2,897 units of homes closed, up marginally from 2,858 units year over year. The average sales price (ASP) was flat from a year ago at $436,000.

Total home orders fell 10% from the prior year to 3,487 homes. In dollars, home orders fell 15% year over year to $1.5 billion on a 5% lower ASP. The decline was due to a 15% cancellation rate. Average absorptions per store was 4.2 per month, down from 4.9 per month a year ago. The average community count increased 4.2% year over year to 274.5 homes.

Entry-level buyers represented 87% of sales orders compared with 83% in the year-ago quarter.
Quarter-end backlog totaled 3,922 units, down 41% year over year. The value of the backlog also decreased by 42% year over year to $1.76 billion.

Adjusted home closing gross margin contracted by 790 basis points (bps) to 22.4% due to the combined effect of greater sales incentives and continued elevated direct costs. Selling, general and administrative expenses — as a percentage of home closing revenues — increased 180 bps to 10.2% from the prior-year quarter’s levels.

Land closing revenues amounted to $17.4 million, down nearly 58% from $41.5 million in the year-ago quarter.

Financial Services: The segment’s revenues rose 23% from the prior-year quarter’s level to $5.73 million.

Balance Sheet

At the end of first-quarter 2023, cash and cash equivalents totaled $957.2 million compared with $861.6 million on Dec 31, 2022. At the end of March 2023, 60,900 lots were owned or controlled by the company compared with 75,100 lots a year ago.

Total debt to capital was 22.1% compared with 22.6% at 2022-end. Net debt to capital was 4.5% versus 6.8% on Dec 31, 2022. MTH repurchased 93,297 shares of its common stock for $10 million during the first quarter. As of Mar 31, 2023, $234.1 million shares remained under the authorized share repurchase program.

Impressively, MTH paid its first-ever cash dividend of 27 cents per share in the first quarter, totaling $9.9 million.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

The consensus estimate has shifted 26.66% due to these changes.

VGM Scores

Currently, Meritage has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise 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 belongs to the Zacks Building Products - Home Builders industry. Another stock from the same industry, PulteGroup (PHM), has gained 0.4% over the past month. More than a month has passed since the company reported results for the quarter ended March 2023.

PulteGroup reported revenues of $3.58 billion in the last reported quarter, representing a year-over-year change of +12.2%. EPS of $2.35 for the same period compares with $1.83 a year ago.

For the current quarter, PulteGroup is expected to post earnings of $2.41 per share, indicating a change of -11.7% from the year-ago quarter. The Zacks Consensus Estimate has changed +15.6% over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #1 (Strong Buy) for PulteGroup. Also, the stock has a VGM Score of A.

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