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Meritage Homes Banks on Entry-Level Buyers, Lower ASP Hurts

Zacks

Meritage Homes Corporation MTH is poised to benefit from its focus on building single-family homes for entry-level and first-time homebuyers. Notably, the company is particularly focused on increasing gross margin and maximizing profits on every sale.

However, rising cost of labor and land are concerning. Also, lower average sales price or ASP is hurting its margins.

A Look at Meritage Homes’ Q2 Performance

Last month, the company reported second-quarter 2019 results, wherein earnings and revenues surpassed the respective Zacks Consensus Estimate, buoyed by strong homebuying activity. Earnings of $1.31 per share topped the consensus mark of $1.03 by 27.2%. The reported figure was in line with the year-ago profit level. Lower home closing revenues and increased interest and SG&A expenses were offset by higher gross margin.

Quarterly order volume (up 21.6% year over year) marked a 13-year record high, driven by a 19% improvement in absorption pace and marginal increase in average community count.

Let’s delve deeper into the factors that are supporting the company’s performance.

Major Growth Drivers

Focus on First-Time/Entry-Level Buyers Bodes Well: Meritage Homes remains focused on boosting demand for entry-level homes with the LiVE.NOW product that addresses the need for lower-priced homes, given affordability concerns. The successful execution of strategic initiatives to boost profitability and focus on entry-level LiVE.NOW homes bode well. Meritage Homes is continuously building homes on a spec basis for LiVE.NOW. communities.

The company believes that the strategy of targeting entry-level buyers is gaining traction and will continue to boost its performance over the long haul. In second-quarter 2019, 41% of total communities and 52% of orders were entry level compared with 34% and 44%, respectively, in the year-ago period.

Upbeat View: The company remains optimistic about second-half 2019 results on the back of an improving demand trend for homes and communities, along with lower interest rates.

Meritage Homes now expects full-year 2019 home closings in the range of 8,700-9,100 versus 8,200-8,700 projected earlier. The mid-point of the guided range is higher than the year-ago reported figure of 8,531 homes. The company expects total home closing revenues within $3.4-$3.6 billion versus $3.25-3.45 billion expected earlier. In 2018, it reported home closing revenues of $3.47 billion.

The company anticipates home closing gross margin in mid-18% and earnings within $5.20-$5.50 per share compared with $4.65-4.95 expected earlier.

Concerns

The company’s home closing revenues dropped 1.1% in second-quarter 2019 due to 6% reduced average selling price or ASP, offsetting 5.3% volume growth. Meritage Homes has reduced the average selling price or ASP for homes in order to address the needs of millennials and baby boomers who want affordable homes, and highly desirable communities.

Meanwhile, the company has been experiencing higher SG&A expenses, mainly due to higher brokerage commissions. Total SG&A was 11.6% of 2019 home closing revenues in first-half 2019 compared with 11.2% in the same period of 2018.

Meanwhile, rising labor and land costs are pressing concerns for Meritage Homes, and other homebuilding companies like KB Home KBH, M.D.C. Holdings, Inc. MDC, PulteGroup, Inc. PHM, Lennar Corporation LEN and others.

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