Let me provide a little perspective on Meritage Homes (NYSE: MTH) before I blindly launch into a discussion of yet another earnings report from yet another sucking-air homebuilder. The company was founded in 1985 by two obviously bright entrepreneurs, who, while still in their early 20s, built wonderful homes in the early days, mostly in sunny Scottsdale, Ariz.
As a homebuilding analyst/dart thrower, I began coverage of Meritage about 10 years ago when it was trading near $8 a share. I then watched it grow into the nation's 12th-largest builder, with operations in Arizona, Texas, California, Nevada, Colorado, and Florida. Over several years, its share price increased to above $112, before being split 2:1. Those shares closed at $15.65 on Friday.
Also on Friday, the company told us that in the September quarter it had lost $118.6 million, or $4.52 per share, versus earnings of $59.3 million, or $2.25 per share, for the third quarter of 2006. Included in the results were $217 million of pre-tax valuation adjustments and goodwill-related write-offs. Total revenues for the quarter fell about 34% to $578.6 million.
To its credit, Meritage's management team, which is now led by CEO Steve Hilton, one of the company's founders, is endeavoring to improve the balance sheet. Debt was reduced somewhat in the quarter, and a new, more flexible credit facility was negotiated with the company's banks.
But Meritage follows announcements of losses from such other, bigger builders as Pulte (NYSE: PHM), Ryland (NYSE: RYL), and Centex (NYSE: CTX). It's likely to be a long time before those and other builders return to the black. Indeed, a turnaround can only come after Countrywide (NYSE: CFC) and the other members of the mortgage sector clean up their chaotic world, which won't happen over night.
In the meantime, I notice that Centex CEO Tim Eller's compensation is now a fraction of its year-ago level. At the same time, Meritage's Hilton made $8.1 million last year. I'm wondering whether he'll now find it appropriate to make do with lots less until his company recovers.
Either way, I'm inclined to loudly trumpet my former caveat that Fools would be well advised to steer very, very clear of the homebuilders. You can make a lot of money in other sectors before the builders even think about becoming legitimate buys.
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