What happened

Shares of Meritage Homes Corp. (NYSE:MTH) are up 15.8% at 12:41 p.m. EDT on July 25, following the company's second-quarter earnings report, which it released after-hours on July 24.

It looks like investors are responding favorably to a few things in the company's results. These include Meritage beating Wall Street analyst estimates for both revenue and earnings.

Wood frame of a house in construction

Image source: Getty Images.

So what

With home closing revenue of $863 million and earnings of $1.31 per share, Meritage's financial results were far better than the $806 million in revenue and $1.03 in earnings per share that the market was looking for.

Moreover, the company also reported strong demand, with orders increasing 22% year over year, and home closings 5% higher than last year's level. These metrics paint a better picture of demand for new homes than many analysts and economists had expected to see, as economic growth has slowed and interest rates have increased over the past couple of years.

Now what

Overall, it looks like the company's entry-level focus -- the strategy it began implementing a few years back -- is working. Average selling prices continue to come down as lower-priced starter homes steadily become a bigger piece of the mix; average prices are down 6% so far this year. But the company also closed over 4,000 homes in the first half of the year, a 4% increase from last year.

Moreover, profitability has remained pretty steady, with 18.4% home-closing gross margin only barely below last year's 18.3% in the quarter, and the $1.31 in earnings per share matching last year's quarter. Meritage also continues to generate solid cash flow, with its cash balance up $96 million since the beginning of the year, while the rest of its balance sheet, including debt, remains at similar levels.

Lastly, management expects to build on a strong first half with even better second-half results. The company thinks it will close between 8,700 and 9,100 homes by year-end, and for home-closing gross margin "to be in the mid-18% range for the year." Expectations for full-year earnings are between $5.20 and $5.50 per share, meaning it would need to earn $3.25 per share in the second half of the year to reach the midpoint of its guidance.

Put it all together, and it's looking like Meritage's starter-home focus has helped it remain in the sweet spot for housing demand, with a solid outlook for demand and expectations for strong earnings in the second half of the year.

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