The Zacks Building Products – Home Builders have been grappling with supply chain woes, a decade’s high inflation, Fed’s back-to-back interest rate hikes and labor constraints.
Defying these odds, Meritage Homes Corp. MTH has been banking on solid housing demand, pricing power and a strong brand presence and focus on entry-level home buyers. Also, the company’s focus on the strategic shift to a pure-play entry-level and first-move-up builder is expected to drive growth.
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This leading homebuilder currently sports a Zacks Rank#1 (Strong Buy) and a Value Score of B. Although its shares have underperformed the industry this year, the Zacks Consensus Estimate for 2022 earnings has moved up in the past month.
The upside now reflects 40.7% year-over-year growth. Also, the consensus mark for revenues indicates 31.7% year-over-year growth. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s delve into the factors supporting the growth of this leading homebuilder.
Improved Housing Market: Lower mortgage rates have been driving the U.S. residential market in the past few months. Furthermore, demand for new single-family homes has seen a V-shaped recovery throughout the country and Meritage Homes is not an exception. The rising work-from-home trend and fear of future interest rate hikes prompt many families to choose new and spacious homes, thereby boosting demand.
Although the recent industry parameters that give a clear picture of housing market conditions are somewhat depressed, solid job data and construction spending numbers are encouraging.
Entry-Level Buyers to Boost Sales: Meritage Homes focuses on boosting the 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. It is continuously building homes on a spec basis for LiVE.NOW communities.
The company believes that targeting entry-level and first move-up buyers are gaining traction and will continue to boost performance over the long haul. Entry-level buyers comprised 86% of first-quarter closings, up from 73% in the prior year. Furthermore, the same comprised more than 83% of orders, up from 76% in first-quarter 2021. It represented 81% of average active communities for the quarter compared with 73% a year ago.
Expanding Land Positions: Meritage Homes continues to find new land positions while being disciplined in underwriting standards. As of Mar 31, 2022, the company had 75,100 total lots under control, up from 58,000 in the year-ago period. This reflects nearly six years’ supply of lots based on trailing 12-month closings.
In the first quarter, it secured more than 4,100 net new lots, translating to an estimated 27 new communities, of which 93% are entry-level.
Margin Driving Moves: The performance of Meritage Homes continues to improve, given the company’s strong order growth, EPS improvement and improving gross margin. The company is making homes out of speculations that promise faster delivery at a lower cost.
Meritage Homes’ strategic shift to a pure-play entry-level and first-move-up builder is expected to yield higher absorptions, aided by an improving community count growth trajectory. The company reduced ASP for homes to address the needs of millennials and baby boomers who want affordable homes and highly-desirable communities.
Additionally, Meritage Homes and other homebuilders like Lennar Corp. LEN, PulteGroup, Inc. PHM and D.R. Horton, Inc. DHI have undertaken various price actions and cost-saving moves to offset macroeconomic woes. These companies are currently observing price-cost neutrality, which will reduce cost pressure on the bottom line.
Discussion of the Above-Mentioned Stocks
Lennar: This well-known homebuilder benefits from effective cost control and focuses on making its homebuilding platform more efficient, leading to higher operating leverage.
Lennar’s earnings for fiscal 2022 are expected to rise 14.4% year over year to $16.33 per share.
PulteGroup: This Atlanta-based homebuilder benefited from a prudent land investment strategy, focusing on entry-level buyers and returning more free cash flow to shareholders. PulteGroup’s annual land acquisition strategies have been resulting in improved volumes, revenues and profitability for quite some time now. The company has been reaping benefits from the successful execution of strategic initiatives to boost profitability, focusing on entry-level homes.
Earnings for 2022 are expected to increase by 46.9% to $10.72 per share.
D.R. Horton: This Texas-based prime homebuilder continues to gain from industry-leading market share, a solid acquisition strategy, a well-stocked supply of land, lots and homes along with affordable product offerings across multiple brands.
D.R. Horton’s earnings are expected to rise 52.2% year over year to $17.37 per share in fiscal 2022.
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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Lennar Corporation (LEN) : Free Stock Analysis Report
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
Meritage Homes Corporation (MTH) : Free Stock Analysis Report
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