Meritage's Order Growth Solid, Focus on Entry Level Holds Key

Meritage Homes Corporation’s MTH continuous focus on building homes for entry-level, first-time and move-up buyers has been yielding positive results. This is evident from the company’s total order growth in the first two months of third-quarter 2019.

Orders through the first two months of third-quarter 2019 grew 24% year over year to 1,549 units. The growth was mainly due to higher absorption per community on slightly fewer communities than a year ago.

Meritage Homes remains focused on growing demand for entry-level homes with its LiVE.NOW product that addresses the need for lower-priced homes, given affordability concerns. The successful execution of strategic initiatives to boost profitability and its focus on entry-level LiVE.NOW homes are major upsides. Meritage Homes is continuously building homes on a spec basis for LiVE.NOW. communities. Notably, since millennials (an 80 million+ market, according to the Census Bureau) are now showing a tendency to set up homes, demand is likely to pick up, which will lead to higher volumes.

Notably, 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. Total orders improved 21.6% and value of net orders grew 13.7% from the year-ago level. Notably, quarterly order volume touched a 13-year record high, driven by a 19% better absorption pace and marginal rise in average community count.

Further, the company remains optimistic about second-half 2019 results on the back of an improving demand trend for homes and communities, along with reducing interest rates.

Price Performance

Shares of Meritage Homes have jumped more than 89% so far this year compared with its industry’s 40.4% rally. The outperformance can be attributed to the company’s impressive earnings surprise trend, having surpassed the Zacks Consensus Estimate in 14 of the trailing 15 quarters. A strong brand presence, and innovation and strategies relating to entry-level and first-move-up communities should drive the stock’s performance in the upcoming quarters as well.

Zacks Rank & Other Key Picks

Currently, Meritage Homes sports a Zacks Rank #1 (Strong Buy). Other top-ranked stocks in the same space include M/I Homes, Inc. MHO, Taylor Morrison Home Corporation TMHC and D.R. Horton, Inc. DHI. While M/I Homes and Taylor Morrison sport a Zacks Rank #1, D.R. Horton carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

M/I Homes and Taylor Morrison surpassed earnings estimates in each of the trailing four quarters, with the average being 11.9% and 41.8%, respectively.

D.R. Horton’s long-term earnings are expected to grow 11%.

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