As housing demand soars, the residential construction sector in the United States is poised for significant growth in the coming years. In this dynamic landscape, keeping an eye on Meritage Homes Corporation (MTH) could be a strategic move. To evaluate its potential, let’s delve more closely into current industry trends and MTH’s role.

The residential construction industry is expanding robustly, driven by several key factors. Increasing population levels, urbanization, and shifting demographics fueling heightened demand for new housing. Additionally, a growing desire for modern, energy-efficient homes is growing, further accelerating the sector’s expansion.

Recent developments have further supported this growth. Mortgage rates dropped to their lowest levels in nearly 15 months this summer, benefiting prospective buyers. Although rates remain elevated, the Federal Reserve has signaled a potential cut in its key interest rate, which could lead to a further decline in mortgage rates in the latter half of 2024.

Moreover, the industry receives substantial backing from the government. The Department of Housing and Urban Development (HUD) launched the $100 million Pathways to Removing Obstacles to Housing (PRO Housing) program to address barriers to affordable housing production.

In June, Vice President Harris announced the first grants from this program, providing $85 million to over 20 cities and states to overcome obstacles to building affordable housing.

In terms of industry performance, privately-owned housing completions in July reached a seasonally adjusted annual rate of 1,529,000, marking a 13.8% increase from July 2023. Single-family housing completions were at a rate of 1,054,000, up 0.5% from the revised June rate of 1,049,000.

Looking ahead, the residential real estate market in the United States is projected to reach a value of $106.70 trillion by 2024. This projection reflects a steady annual growth rate of 3.6% from 2024 to 2029, with an anticipated market volume of $127.40 trillion by 2029.

Given these trends, MTH stands to benefit significantly. With a market capitalization of $6.53 billion, MTH is the fifth-largest homebuilder in the United States, specializing in designing and constructing single-family homes.

Its Homebuilding segment focuses on land acquisition, construction, marketing, and customer service, while the Financial Services segment offers essential services such as title, escrow, mortgage, and insurance.

MTH’s shares have shown promising performance, increasing 19.5% over the past six months and 26.2% over the past year to close the last trading session at $179.76. Let’s now explore the factors that might influence MTH’s performance in the near term.

Recent Developments

On August 6, MTH entered into a multi-year exclusive agreement with James Hardie Building Products Inc., a subsidiary of James Hardie Industries plc (JHX), a North American leader in home-building products. The partnership builds on their existing relationship and expands their collaboration.

Under this agreement, Hardie® siding and trim will be the standard for every new MTH home with hard siding across the United States through 2027. The standardization aims to enhance product consistency and quality in MTH’s homes.

Moreover, the alliance is set to drive MTH’s growth by reinforcing its commitment to premium materials. By standardizing Hardie® products, MTH is poised to expand its market presence and solidify its reputation for high-quality home-building solutions.

Sound Historical Growth

Over the past five years, MTH’s revenue has grown at a CAGR of 13.2%. Its operation income (EBIT) and total assets increased at CAGRs of 30.7% and 14.8%, respectively. In addition, the company’s EBITDA rose at a CAGR of 28.9%.

Moreover, during the same time frame, the company’s net income and EPS grew at respective CAGRs of 32.4% and 34.3%.

Robust Financials

In the fiscal 2024 second quarter, which ended on June 30, MTH’s homebuilding segment saw total closing revenue rise 8.1% year-over-year to $1.69 billion. Earnings before income taxes grew 24.1% to $297.36 million, and net earnings increased 23.9% to $231.56 million.

Earnings per common share also increased 25.7% year-over-year, reaching $6.31. Meanwhile, as of June 30, 2024, MTH’s cash and cash equivalents totaled $992.92 million, up from $921.23 million on December 31, 2023.

Mixed Analyst Estimates

Analysts expect MTH’s revenue for the fiscal third quarter (ending September 2024) to decrease 1.2% year-over-year to $1.59 billion. Similarly, its EPS for the same quarter is expected to decline 16.2% from the prior year’s quarter to $5.01. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

Looking forward, for the fiscal year ending December 2024, Street expects MTH’s revenue and EPS to increase 3.3% and 5.6% from the previous year to $6.32 billion and $21.04, respectively.

Furthermore, the company’s revenue and EPS for the next fiscal year ending in December 2025 are expected to grow 6.1% and 3.4% year-over-year to $6.70 billion and $21.76, respectively.

Mixed Profitability

MTH’s trailing-12-month gross profit margin of 26.01% is 29.5% lower than the 36.89% industry average. Its trailing-12-month levered FCF margin of negative 4.06% unfavorably compares to the industry average of 5.58%.

However, the company’s trailing-12-month EBITDA margin of 16.38% is 43% more than the industry average of 11.45%. Similarly, its trailing-12-month net income margin of 12.98% is 184.02% higher than the industry average of 4.57%.

Also, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 18.36%, 11.03%, and 12.11% are 59.6%, 80.6%, and 186.8% higher than the industry averages of 11.51%, 6.11%, and 4.22%, respectively.

Discounted Valuation 

In terms of forward non-GAAP P/E, MTH is trading at 8.54x, 44.7% lower than the industry average of 15.45x. The stock’s forward EV/Sales multiple of 1.09 is 10% lower than the industry average of 1.22x. Likewise, its forward EV/EBITDA of 6.63x is 32.4% lower than the industry average of 9.81x.

Moreover, MTH’s forward Price/Book of 1.27x is 48.8% lower than the 2.47x industry average. Meanwhile, its forward Price/Cash flow of 8.25x is 15% lower than the sector average of 9.70x.

POWR Ratings Reflect Uncertainty

MTH’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MTH has achieved an A grade in Momentum, which is evident from its robust stock price performance. Currently, the stock is trading higher than its 50-day and 200-day moving averages, which stand at $175.90 and $164.52, respectively.

In addition, the stock has a C grade for Quality, which is justified by its mixed profitability metrics. The stock also has a C grade in Sentiment, consistent with its mixed analyst estimates. Within the B-rated Homebuilders industry, MTH is ranked #14 out of 23 stocks.

Beyond what I have stated above, we have also given MTH grades for Growth, Value, and Stability. Get all MTH ratings here.

Bottom Line

The residential construction sector is on a robust growth trajectory, fueled by urbanization, favorable mortgage rates, and government incentives. MTH is strategically positioned to take advantage of this expansion, thanks to its valuable partnerships.

However, with MTH’s profitability showing fluctuations and its 60-month beta at 1.80 indicating higher volatility, investors might consider waiting for a more optimal entry point before buying the stock.

How Does Meritage Homes Corporation (MTH) Stack Up Against Its Peers?

Given the current uncertainty around MTH’s near-term prospects, its potential to outperform in the coming weeks and months may be less clear. However, there are other industry peers with much more impressive POWR Ratings.

So, consider these three A (Strong Buy) and B (Buy) rated stocks from the Homebuilders industry: NVR, Inc. (NVR), M/I Homes, Inc. (MHO), and Tri Pointe Homes, Inc. (TPH). To explore more A & B-rated homebuilding stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

MTH shares were unchanged in premarket trading Monday. Year-to-date, MTH has gained 4.14%, versus a 17.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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