Here's Why Investors Should Add Meritage Homes Stock Now

Although the homebuilding industry is facing challenges like high mortgage rates and rising costs, Meritage Homes Corporation MTH is likely to benefit from improved cycle times and spec strategy implementation. The company's focus on entry-level and first-move-up homes will likely produce a higher volume in the future.

Shares of this Scottsdale, AZ-based homebuilding company have appreciated 10.9% in the past year compared with the Zacks Building Products - Home Builders industry's 18.9% rise.

The company reported impressive first-quarter 2024 results, demonstrating its strong performance amid challenging industry conditions. Despite market volatility, earnings and total closing revenues increased on a year-over-year basis by 42.9% and 14.5%, respectively, on the back of higher deliveries and adjusted gross margin (up 340 basis points year over year). Total home orders also rose 14% year over year, driven by strong demand and a low cancellation rate of 8%, supported by the right amount of available inventory.

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Let's discuss the factors supporting positive investor sentiments amid headwinds.

What Makes the Stock Attractive?

Solid Spec Strategy: The company's spec homes are built without a prior buyer lineup, focusing on efficient construction quality and desired features. Meritage Homes' strategy in speculative homebuilding has been consistently driving its revenues. By maintaining a few months' supply of move-in-ready homes based on community-level sales, MTH reduces wait times for buyers compared with traditional methods. This approach also supports a lower average selling price, stimulating demand in the market.

Home closings rose 21% year over year in first-quarter 2024. Its spec-building strategy resulted in 3,507 homes delivered. Solid execution on its spec building and streamlined strategy helped it achieve yet another record backlog conversion rate of 138% and a return on equity of 18% during the quarter.

Prudent Land Acquisition Strategy: The company invests aggressively in land acquisition and development, which is critical for community count and top-line growth. In first-quarter 2024, Meritage Homes accelerated its investment in internal growth, with $430.4 million spent on land acquisition and development, up 39% from $310.1 million a year ago. At March-end, 66,400 lots were owned or controlled by the company compared with 60,900 lots a year ago. For the year, it expects land spending in the $2-$2.5 billion range as it develops its land and ramps up its lot portfolio for community count growth.

Focus on Entry-Level Buyers: Meritage Homes remains focused on the growing demand for entry-level homes with its LiVE.NOW product that addresses the need for lower-priced homes, given the rising interest rates and home prices. The successful execution of strategic initiatives to boost profitability and focus on entry-level LiVE.NOW homes boosted the upside.

The company believes that its strategy of targeting entry-level and first-move-up buyers is gaining traction and will continue to boost performance over the long haul. In the first-quarter 2024, entry-level buyers represented 91% of sales orders versus 87% in the year-ago period. The new lots added this quarter represent 43 future communities, all for entry-level products. Additionally, the company has approximately 28,000 lots in its pipeline, where due diligence is still ongoing.

MTH strategically shifts to being a pure-play entry-level and first-move-up builder, expecting higher absorptions with an improving community count growth trajectory. Additionally, the company has reduced average sales price in the first quarter by 4% year over year for the homes to address the needs of millennials and baby boomers who want affordable homes and highly desirable communities.

Valuation & Estimate Revision

The company's earnings estimates for 2024 showcase growth rate of 1.7% from the year-ago period's tally on a 1.3% revenue improvement. Its earnings topped the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 27%. Earnings estimates for 2024 have increased to $20.27 per share from $19.99 in the past 60 days. The positive trend signifies bullish analysts' sentiments and robust fundamentals in the near term.

From the valuation point of view, with a forward 12-month price-to-earnings ratio of 7.3X, below the industry average of 9.1X, the stock presents a potentially attractive valuation for investors seeking exposure to the housing industry. The company is also trading below the other industry players like KB Home KBH, PulteGroup, Inc. PHM and NVR, Inc. NVR.

Conclusion

MTH's strategy of capitalizing on the solid demand for entry-level and first-move-up homes will likely produce higher volume in the future, especially from digital communities, and help it gain market share across the region served.

Investors might consider adding this Zacks Rank #2 (Buy) stock to their portfolios, anticipating further growth bolstered by strong financial performance, valuation and expanding community count.

A Brief Review of Other Players

KBH currently carries a Zacks Rank #2. It has a trailing four-quarter earnings surprise of 18.4%, on average. Shares of KBH have gained 29.6% in the past year.

The Zacks Consensus Estimate for KBH's 2024 sales and earnings per share indicates a rise of 6.5% and 18.2%, respectively, from prior-year levels.

PulteGroup currently carries a Zacks Rank #2. PHM has a trailing four-quarter earnings surprise of 12.5%, on average. Shares of PHM have risen 34.3% in the past year.

The Zacks Consensus Estimate for PHM's 2024 sales and EPS indicates a rise of 7.9% and 10%, respectively, from prior-year levels.

NVR presently carries a Zacks Rank #2. NVR has a trailing four-quarter earnings surprise of 9.7%, on average. Shares of NVR have gained 19.4% in the past year.

The Zacks Consensus Estimate for NVR's 2024 sales and EPS indicates a rise of 8.6% and 6.6%, respectively, from the prior-year levels.

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