On Jun 20, Zacks Investment Research downgraded
Meritage Homes Corporation
) to a Zacks Rank #5 (Strong Sell), given the unfavorable demand
trends witnessed by the company in the last few months and a weak
outlook for the upcoming quarters.
Why the Downgrade?
Shortage of lots and skilled labor and rising cost of materials
have been making things difficult for builders for quite some time
now. Meritage too expects higher land costs in 2014. However,
despite the strong pricing power in the housing industry, Meritage
expects softer pricing in 2014. As a result, the company expects
home closing gross margin to remain flat year over year in 2014.
The company has been witnessing slower sales pace in the Western
region, one of its strong markets, over the last few quarters.
Particularly, home sales in Arizona were sluggish in the last few
months. Even housing demand in California and Colorado slowed down
in the first quarter 2014 compared to the year-ago quarter. The
weak demand trend in the Western region, which accounts for more
than 47% of the company's total revenue, resulted in declining
order trends in the first quarter of 2014.
Further, the housing data provided by the U.S. Department of
Housing and Urban Development and the U.S. Census Bureau for the
month of May corroborates the trend. Per the data, housing
production declined 16.3% in the West. Even the housing permit
data, which is an indicator of future home building activity,
declined in the West. As such, Meritage is likely to witness
continued weakness in this operating region in the near term.
The company missed both earnings and revenue estimates in the first
quarter of 2014 due to slowdown in order trends..
Estimates have been declining ever since the company released its
first quarter 2014 results in Apr 2014. During the last 60 days,
the Zacks Consensus Estimate for fiscal 2014 declined 11.8% to
$3.36 per share while that for 2015 declined 7.6% to $4.16 per
Investors interested in the homebuilding sector can consider stocks
Toll Brothers, Inc.
TRI Pointe Homes, Inc.
). All the three companies hold a Zacks Rank #2 (Buy).
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