Meritage Homes Belatedly Pivots Toward Entry-Level Home Buyers

I had high hopes for Meritage Homes (MTH) before and after the company reported earnings last month. Home builders were leading the market into a big sell-off, and I expected MTH to set the record straight on the health of the housing market. The headline earnings were solid but not quite inspiring enough. The stock gapped down at the post-earnings open, but buyers took the stock up to a healthy 5.8% gain on the close. MTH has not closed higher since then as its 50-day moving average (DMA) held firm as resistance and soon after the 200DMA gave way as support.

In a sign of lost momentum, Meritage Homes (MTH) has gone nowhere after two earnings reports.

In a sign of lost momentum, Meritage Homes (MTH) has gone nowhere after two earnings reports.

Source: FreeStockCharts.com

For its last fiscal year, MTH reported the following changes over the previous year:

  • Homes closed (units) +5%
  • Home closing revenue +6%
  • Ending backlog (units) +9%
  • Ending backlog value +10%
  • Earnings before income taxes +14%
  • Net earnings -4%
  • Diluted EPS -4%
  • cash and cash equivalents +29.6%

MTH highlighted that its results delivered a “…seventh consecutive year of annual order growth and [its] highest pretax earnings in over a decade.”

Net earnings in the 4th quarter were impacted by a $19.7M charge representing a devaluation of MTH’s deferred tax asset as a result of the cut in the corporate tax rate. Without this charge, full year net earnings would have increased 9.0% over the previous year – similarly for diluted EPS. MTH plans to take its $20 to $25M in savings on the reduction in the corporate tax rate to build 4 to 6 more communities. I consider those plans a key confirmation on the company’s confidence in the health of its housing markets.

Home closing gross margin remained flat year-over-year at 17.6% “…as anticipated, with cost inflation offsetting the appreciation in average sales prices of homes closed in 2017.” MTH’s biggest cost headaches are coming from concrete and lumber.

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Disclosure: Long MTH shares and call options.

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