Homebuilder Meritage Homes (NYSE:MTH) reported second-quarter earnings on July 29, coming in ahead of Wall Street estimates for earnings, but a little light on revenue. The highlights:
- Total revenue of $597.8 million, up 18% from last year
- $0.70 earnings per share; down from last year but ahead of expectations
- 21% increase in number of homes ordered
- $1.297 billion backlog, up a strong 36% from last year
Overall, it was a pretty solid result. There are a few things that bear watching, however, including the company's margin results, its new growth markets, and the impact of severe weather on a major market that will delay a lot of closings. Let's take a closer look at the key details.
The big picture
Meritage's "decent" results on revenue and earnings are getting overshadowed by the strong double-digit growth reported by D.R. Horton after hours on the 28th, and news that pending U.S. home orders declined a little in June. Factor in earnings and margins that are short of last year's stellar results, and the market is pushing Meritage shares down about 1% on the day.
But looking at the bigger picture, pending sales may be down sequentially, but were still well above last year's level, up 8.2% from June 2014. This measures existing home sales, so it's not a clear picture of the new-homes market. However, the Census Bureau released its new residential construction survey on July 17, and the June numbers are solid, with new permits up 30%, housing starts up 27%, and completions up 22% from June 2014. In other words, activity is really picking up in new home construction.
This is important because, as the National Association of Realtors chief economist Lawrence Yun stated earlier this year, one of the big pressures on home prices in many markets is limited inventory of new and existing homes. Existing home sales in June were at the highest seasonally adjusted pace since before the recession began. The percentage of first-time homebuyers remained above 30% in June, as well, marking four months of 30%-plus first-time buyers.
All in all, the U.S. housing market remains strong after six weak years and a very slow recovery that looks like it's finally building momentum.
It's just like politics
Housing is local, so regionality plays a big role in what a homebuilder like Meritage will actually report. Meritage operates primarily in the Southwest, the West Coast, and Texas, and has recently expanded its presence in the Southeast. Texas and the western states have been historically great markets, but have become more saturated; this led to the company focusing on eastern expansion. It's looking like that was a smart decision, with a weakening oil market further threatening the key Texas market.
While the overall results in Texas have been relatively solid considering the major decline in oil prices and its potential job-killing impact, the bigger problem for now is severe weather. In the earnings release, Meritage announced that the severe flooding that hit much of the state earlier this summer caused significant delays in construction, and that as many as 200 closings in Texas and Colorado -- which also experienced severe weather -- would likely be delayed until 2016. The company announced the following changes in full-year guidance as a result:
|Revenue Growth||Full-Year EPS|
The company reported a decline in homes delivered in both West and Central regions in the quarter, but delivered 81% more homes in the East versus last year. Revenue increased 81% in the East market, as well, and was actually up in Texas, even with the decline in unit sales.
Home closing margin percent was 19.3% in the quarter, up from 18.5% from Q1, and closer to the 20% that management says it should attain for the the full year. This will come in below last year's 21.9%, but that was driven by some positive price increases that the company doesn't expect to see in 2014. At any rate, it does look like the company is working through the hiccups from its Legendary Homes acquisition last year that negatively affected margins during the past couple of quarters.
As to the company's projections, it has a very solid backlog of existing orders in place:
That's a major increase in orders in the West and East regions, largely due to the increase in the number of selling communities. And while Texas' backlog is down, it's a product of faster sell-through of its inventory, and not weakness in the market. The company reported that it has added a net of seven new communities in the Lone Star State so far this year.
Building something big
Meritage may have come up short of analyst estimates for revenue, and there will clearly be some weather-related impact to the full-year result, but the overall results were pretty solid, especially in light of the earnings boost the company got last year from unexpectedly high prices in several markets.
But looking at the bigger picture, Meritage has a solid backlog that's growing, evidence that it's executing well on its growth plans. Selling, general, and administrative expense was steady at 12.2% of sales, evidence that management is keeping costs in line.
Overall, the company is competing against last year's unsustainable margins, and feeling the impact of bad weather on sales in one of its biggest markets. The big-picture and long term, however, look to be in great shape, based on strong order growth, the huge backlog, increasing selling prices and margin percent, and relatively steady expenses.