Meritage Homes Down Despite Q2 Earnings Beat, Soft Outlook - Analyst Blog

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Share price of Meritage Homes Corporation 's ( MTH ) dipped 3.85%, after the company lowered its outlook for community count for 2014 while it reported second quarter 2014 earnings. Meritage Homes posted second quarter results with earnings per share of 85 cents that beat the Zacks Consensus Estimate of 81 cents by 4.94%. Earnings per share increased 15.0% year over year due to an increase in revenues, margin expansion and operating leverage.

Meritage Homes Corporation - Earnings Surprise | FindTheBest


Total revenue in the second quarter of 2014 amounted to $505.6 million, up 12.4% year over year on the back of a double-digit increase in home closing revenues and average selling prices. Reported revenues marginally beat the Zacks Consensus Estimate of $505 million.


Quarter in Detail

Meritage's home closing revenues were $502.8 million, up 15.3% from the prior-year quarter. Year-over-year growth in home closing revenues was attributable to a 4% increase in the number of homes closed and a 12% hike in average closing prices.

Land closing revenue was $2.8 million, down 79.9% from the prior-year quarter.

Net sales orders rose 0.6% year over year to 1,647 units during the quarter, with highest order growth being recorded at Texas and Carolinas. The value of Meritage's net orders rose 8.0% to $618.4 million. The company had 175 active communities as of Jun 30, 2014, up 6.0% from 165 as of Jun 30, 2013.

The company started raising prices in most of its communities as the company offered larger homes in higher priced communities. Accordingly, the average selling price of the closings shot up 12% in the quarter to $368,000 owing to favorable mix.

Meritage's backlog totaled 2,548 homes as of Jun 30, 2014, up 12% from 2,283 homes as of Jun 30, 2013. The value of backlog grew 18% year over year to $951.6 million in the quarter, owing to stronger demand and a 6% increase in prices.  

Meritage's adjusted home closing gross margin expanded 40 basis points (bps) year over year to 21.9% in the second quarter of 2014, driven by price appreciation. Pre-tax margin rose 240 bps to 10.9% in the second quarter 2014, owing to operating leverage. Effective tax rate increased to 36% in the quarter from 27% in the prior-year quarter.

General and administrative expenses for the second quarter of 2014 declined 10 bps to 4.9%.

Financial Update

Meritage has cash and cash equivalents of $230.6 million as of Jun 30, 2014, compared with $261 million as of Mar 31, 2014.

Acquisition of Legendary Communities

On Jul 10, 2014, Meritage entered into a definitive agreement to acquire Atlanta-based Legendary Communities for a purchase price of about $130 million. The acquisition is expected to close in the third quarter of 2014.The acquisition will expand Meritage's presence in the Southeast and add 40 active selling communities to the company's total. The acquisition will allow the company to enter the lucrative housing market of Atlanta and Greenville-Spartanburg. The acquisition will also strengthen the company's presence in Charlotte.  

Lowered Outlook for 2014

Meritage Homes lowered its expected community count to the range of 205 to 215 compared to the previously provided range of 210 - 220 by the end of 2014. The guidance excludes the pending acquisition of Legendary Communities. However, it expects solid revenue and earnings growth in the latter half of 2014 on the back of an 18.0% increase in backlog value in the present quarter.

Meritage Homes Corporation currently carries a Zacks Rank #4 (Sell).

Better-ranked stocks in the building/ construction sector include Martin Marietta Materials Inc. ( MLM ), Beazer Homes USA Inc. ( BZH ) and Toll Brothers Inc. ( TOL ). All these companies hold a Zacks Rank #2 (Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: TOL , MLM , BZH , MTH

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