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Meritage Homes Corp Stock Up 14% on Earnings Beat

By Jason Hall - Jan 28, 2016 at 10:58AM

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The top-10 homebuilder topped profit estimates in the fourth quarter and saw improvement in several key metrics.

What: Shares of homebuilder Meritage Homes Corp (MTH -3.65%) are up more than 13% at 11:20 a.m. ET on Jan. 28, following the release of the company's fourth-quarter and full-year 2015 financial results. 

So whatThe big driver behind Mr. Market's positive response today was the earnings result of $1.26 per share, which was 7% better than the year-ago quarter, and also better than what Wall Street analysts were forecasting. Meritage saw strong growth in its eastern and western regions, with home closing revenues up 18% and 27% respectively in the quarter. The central region was the one slow spot, as home sales in Texas began to slow due to the weakness in oil prices, which are impacting one of that state's largest sources of employment.

However, it's worth noting that orders for new homes increased in every state except Colorado (and they declined there primarily because the company has fewer active communities with selling properties there than a year ago). Texas particularly could rebound soon, with orders and order value up 16% and 29%, respectively, last quarter. 

Now what: Meritage continues to work through a challenging labor environment, as strong demand and a smaller labor pool are pushing up labor costs due to increased competition for skilled construction workers. Combined with land prices that have increased faster than finished home values over the past year, the company saw gross margins get squeezed a little in the quarter. 

At the same time, the company is doing a somewhat better job reducing some of its operating costs, with general and administrative costs down slightly as a percentage of sales due to increased revenue as well as cost-cutting initiatives. 

Looking ahead, Meritage management thinks it can continue to grow at a relatively fast rate. The company expects to grow its community count by 5% to 10% by year-end, and entered 2016 with a $1.1 billion backlog, up 34% from the year before. 

In summary, Meritage continues to execute on what it can control, and respond to challenges such as labor supply and land prices as best it can. New home construction overall has only just begun to return to what most experts view as the minimum level needed to support demand for the long term, so it's probably not a stretch for Meritage to reach its growth goals in 2016 and beyond. 

Looking for more in-depth coverage of Meritage Homes' earnings? Stay tuned here in the next few days. 

Jason Hall owns shares of Meritage Homes. The Motley Fool recommends Meritage Homes. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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