Bull of the Day: Meritage Homes (MTH)

Meritage Homes Corp. (MTH) is perfectly situated to take advantage of the Millennial home buying rush. This Zacks Rank #1 (Strong Buy) is expected to grow its revenue by the double digits in both 2020 and 2021.

Meritage is the 7th largest public homebuilder in the United States. It has 300 communities across 9 states including Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.

It focuses on first-time and first move-up buyers.

Unprecedented Demand in July and August

On Sep 21, Meritage put out a business update on its first two months of the third quarter which included July and August.

It saw “unprecedented demand” in those two months and already sold more in just 2 months than it sold in the entire third quarter of last year.

Meritage also saw the strong demand continue into September.

In July and August, total orders jumped 73% year-over-year to 2,675 homes, up from 1,549 homes in the same period a year ago.

Average absorptions for those 2 months nearly doubled over the prior year to about 6 homes per month per community, net of 13% order cancellations in 2020 and 17% in 2019.

The company expects to close out some of its communities in late 2020 and early 2021 due to the strong demand so it’s on the hunt for new land positions so it can continue to grow its community count in 2021.

Meritage expected to put a record number of new lots under control in the third quarter, possibly more than 9,000 in total.

For the first 3 quarters, that would be 17,000 lots, which is close to the total number of lots it acquired in all of 2019 and is 70% more than 2018’s 10,000 lots.

Like all the homebuilders right now, Meritage has pricing power and has been able to push through price increases which have covered the rising costs of lumber and other materials.

Margins are expected to remain high.

Record Second Quarter During the Coronavirus Pandemic

On July 22, Meritage reported its second quarter results and blew by the Zacks Consensus Estimate by $0.86.

Earnings were $2.38 versus the Zacks Consensus of $1.52.

That’s a beat of 56%.

After the coronavirus lock downs hit the typical spring home buying season in April, sales bounced back strongly in May and June, and resulted in the company’s two highest selling months ever and an all-time company record of nearly 3,600 orders for the quarter, up 32% year-over-year.

Order trends improved each month in the quarter with April orders, the pandemic month, 15% lower than last year, but May saw an increase of 44% year-over-year and June was even hotter, up 66% compared to 2019.

Absorptions were up 42% year-over-year and averaged about 5 homes per month in roughly 240 communities.

Demand was strong across the country, with Arizona and Texas seeing the highest absorptions.

Entry-level represented 57% of total active communities as of June 30 and 70% of total orders in the quarter, up from 41% of total communities in 2019 and just 51% of orders.

These are the Millennial buyers, of which a large contingent is reaching the important family formation years of 28-33.

Historically low mortgage rates which have fallen under 3% for a 30-year fixed rate, combined with low inventory of existing homes for sale, has pushed buyers into the new home market.

Additionally, many of Meritage’s communities are located in big city suburbs, which is exactly where the buyers wanted to be after enduring the coronavirus lock down in urban locations.

Meritage was able to improve its gross margin to 21.4%, the highest in 6 years.

It continues to have a strong balance sheet with almost $500 million in cash.

Strong Full Year Guidance

As of July 22, Meritage was already predicting a strong finish to the year with full year earnings forecast to be between $8.75 and $9.25 with gross margins of 21%.

But after the strong sales guidance, the analysts got even more bullish.

The 2020 Zacks Consensus Estimate has jumped to $9.60 from $9.53 over the last week, which is earnings growth of 49.5% over 2019 as Meritage only made $6.42 last year.

They are equally as bullish on 2021.

The 2021 Zacks Consensus has also moved higher over the last 7 days, to $11.29 from $11.02. That’s further earnings growth of 17.7%.

A Golden Era For the Homebuilders?

The homebuilders have been trudging along since 2012 with no real catalyst to spur growth until this year.

The Millennials are the second largest generation in US history, larger than even the Baby Boomers. And now they want to buy homes.

Shares of Meritage are hitting new 5-year highs and have soared 80.6% in 2020.

But they’re still cheap by nearly every value metric.

Meritage has a forward P/E of just 11 and a price-to-book of 0.3.

With its big earnings growth, it sports a PEG of 0.5.

The entire home building industry has been on fire in 2020.

7 homebuilders are Zacks Rank #1 (Strong Buys) including Toll Brothers (TOL), KB Home (KBH), DR Horton (DRI) and Lennar (LEN).

For investors looking for a way to play the first-time Millennial home buyer, Meritage is one to keep on your short list.

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