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Why Meritage Homes Stock Popped 10% -- Then Dropped

By Rich Smith - Jan 30, 2020 at 12:41PM

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Sales prices may be weakening, but margin improvement more than makes up for it.

What happened

Shares of Scottsdale, Arizona-based homebuilder Meritage Homes (MTH 2.46%) leapt out of the gate this morning, after the company reported fourth-quarter earnings last night. Earnings for the quarter came to $2.65 per diluted share, versus analyst expectations of $1.93 per share -- a beat -- and sales were ahead of expectations as well, at $1.14 billion, about 10% better than projected.

Up 10% in early trading, Meritage stock has since retraced a bit, but is still holding onto a 4% gain as of 11:30 a.m. EST.

Homebuilders review a blueprint in front of house under construction

Image source: Getty Images.

So what

Why did Meritage pop, and why has it since dropped?

In its Q4 report, Meritage noted that home sales closed in the quarter increased 13% year over year to 2,830 units. Revenue from those sales, however, climbed only 11%, because of a 2% decline in the average selling price of the homes Meritage built.

On the plus side, despite falling sales prices, the profitability of Meritage's sales increased dramatically, with gross margins rising 80 basis points to 19.8%, and selling, general, and administrative costs falling 50 basis points to 10.1%. As a result, earnings per diluted share climbed 39% year over year.

Now what

Meritage builds homes in the markets of Arizona, California, Colorado, Florida, Georgia, North and South Carolina, Tennessee, and Texas, and these look like very hot markets. In its report, Meritage noted that as fast as closings grew in Q4, future sales could grow even faster.

New home orders booked grew 27% in Q4, though the prices of these homes will again decline from where they were a year ago -- down about 1% on average. This still leaves total order value up 25% year over year, which may explain why investors pulled their buying back a bit after the stock's initial surge.

That being said, while Meritage didn't give specific guidance for what it expects to earn this current quarter, or this year, all the numbers it did reveal look pretty great. With Meritage stock selling for less than 13 times earnings today, and orders up roughly twice that, Meritage Homes' stock's run looks far from done.

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