A month has gone by since the last earnings report for Meritage Homes (MTH). Shares have added about 6.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Meritage due for a pullback? 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 Corporation reported third-quarter 2024 results, wherein earnings and total closing revenues topped the Zacks Consensus Estimate but declined year over year. This is the seventh consecutive quarter of earnings and revenues beat.
Meritage Homes’ third-quarter results highlight a strategic shift to affordable, quick-turn homes, driving $1.6 billion in revenues and record closing volume. The company reported a 145% backlog conversion and a 17.2% return on equity. Capital allocation focused on growth with $659.4 million in land investments, 7,800 new lots, and $57.1 million returned to shareholders.
Earnings & Revenue Discussion
Earnings per share (EPS) of $5.34 topped the Zacks Consensus Estimate by 5.7%. The reported figure decreased 11% from the year-ago quarter’s reported EPS of $5.98.
Total revenues (including Total Closing revenues and Financial Services revenues) amounted to $1.6 billion, down 1.4% from $1.62 billion reported in the year-ago period.
Segment Discussion
Total Closing Revenues: Total closing revenues were $1.588 billion, which declined 2% from the prior-year quarter’s level but topped the consensus mark of $1.57 billion by 0.7%.
Under the Homebuilding umbrella, home closing revenues of $1.586 billion declined 2% from the prior-year quarter’s level due to a lower average sales price (ASP). Land closing revenues also dipped 4% to $2.7 billion from a year ago.
Meritage Homes reported 3,942 units of homes closed, up 8% from the year-ago quarter. The ASP of homes closing declined 9% from a year ago to $402,000 due to product and geographic mix.
Total home orders inched up 1% from the prior year to 3,512 homes. In dollars, home orders decreased 5% year over year to $1.43 billion. A 6% lower ASP of $406,000 due to both geographic and product mix shifts impacted growth to some extent. The average absorption pace was 4.1 per month in the quarter, the same as last year. Ending community count was 278, up 2.2% year over year but 3.1% sequentially.
Entry-level buyers represented 92% of sales orders compared with 88% in the year-ago period.
The quarter-end backlog totaled 2,284 units, down 37% year over year. The value of the backlog also decreased 40% year over year to $931.7 million.
Adjusted home closing gross margin contracted 190 basis points (bps) to 24.8%. This decline was driven by increased lot costs, higher use of financing incentives, and reduced leverage on fixed costs due to lower home closing revenue. However, the impact was partially offset by cost-saving measures and faster construction cycle times.
Selling, general and administrative expenses — as a percentage of home closing revenues — improved 20 bps from the prior-year quarter to 9.9% owing to lower performance-based compensation costs.
Financial Services: The segment’s revenues rose 32% from the prior-year quarter’s level to $8.1 million.
Balance Sheet
At the end of the third quarter, cash and cash equivalents totaled $831.6 million, down from $921.2 million reported on Dec. 31, 2023. As of Sept. 30, 2024, approximately 74,800 lots were owned or controlled by the company compared with about 60,700 lots a year ago.
Total debt to capital was 20.7% compared with 17.9% in 2023-end. Net debt to capital was 8.8% compared with 1.9% on Dec. 31, 2023.
For the first nine months of 2024, net cash used by operating activities was $128 million against $460.1 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 $27.1 million to its shareholders. It brought back 151,220 shares for $30 million. As of Sept. 30, 2024, $99.1 million in shares remained under the authorized share repurchase program.
Q4 2024 Guidance
Meritage Homes expects 3,750-3,950 closings for the year compared with 3,951 closings in the year-ago period. The closings are likely to generate revenues between $1.5 billion and $1.59 billion, which is down from $1.64 billion reported a year ago.
Home closing gross margin is expected to be in the 22.5-23.5% range compared with 25.2% a year ago. EPS is expected to be between $4.10 and $4.60, down from $5.38 reported a year ago. The company still expects an effective tax rate of approximately 22.5%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates 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 second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. 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 #3 (Hold). We expect an in-line 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, PulteGroup (PHM), a stock from the same industry, has gained 4.8%. The company reported its results for the quarter ended September 2024 more than a month ago.
PulteGroup reported revenues of $4.48 billion in the last reported quarter, representing a year-over-year change of +11.8%. EPS of $3.35 for the same period compares with $2.90 a year ago.
PulteGroup is expected to post earnings of $3.21 per share for the current quarter, representing a year-over-year change of -2.1%. Over the last 30 days, the Zacks Consensus Estimate has changed -2.4%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for PulteGroup. Also, the stock has a VGM Score of B.
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Meritage Homes Corporation (MTH) : Free Stock Analysis Report
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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 Nasdaq, Inc.
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