Equity Research Report
Meritage Homes Corporations
Meritage Homes is the sixth-largest public homebuilder
in the United States, based on homes closed in 2020.
Meritage offers a variety of homes that are designed
with a focus on entry-level and first move-up buyers in
Arizona, California, Colorado, Texas, Florida, Georgia,
North Carolina, South Carolina and Tennessee.
8th August 2021
Name: Meritage Homes Corporation
Ticker: MTH
Exchange: NYSE (New York Stock Exchange)
Current Share Price: US$ 115
Industry: Homebuilding
Sector: Consumer Durables
Implied Market Cap: US$4.302b
Shares outstanding: 37.31m
Key points and Recent takeaways
MTH Homes spent a record $506 million on land and secured approximately 11,200 new lots and
already control all the land necessary to achieve its 300 active community goal by mid-2022. This can be
seen by increase in community count of 203 Q1 2021 to 226 Q2 2021. Cost affordability is still a priority.
It achieved best second quarter of closings and generated the highest quarterly home-closing gross
margin in company history of 27.3%. This quarter led to an 83% year-over-year increase in second
quarter diluted EPS of $4.36 followed by 85% increase in net earnings, orders were up 4%, closings were
up 21% and had a 530-bps increase in home closing gross margin to 26.1%. And SG&A as a percentage of
home closing revenues improved 100 bps to 9.5%. The housing market remains robust Mortgage
interest rates remain at or near historical low levels. Buyers in the entry-level space are mostly buying a
payment, so as long as rates remain low and the average monthly payment makes sense, the demand
continues to be strong of new and existing homes for sale and advantageous demographic trends in new
home ownership for the millennial and baby boom generations. The homebuilding industry has already
experienced an uptick in demand prior to COVID-19.
Valuation and Forecast Analysis
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ASP as per our estimates will be around 390-405 for ‘22 & ‘23, as mentioned by management
MTH homes is able to source low-cost land with an average lot price of $75,000 on a go-forward
basis which should allow to position their products below $400,000 over the next two years and
is focused to achieve so as affordability is a priority.
Gross margin is expected to remain elevated next year as the land that’s falling through is land
MTH homes brought two years ago which is mentioned by management in conference call and
the land brought 2 quarters ago will underwrite normal margins which won’t happen till late ’23
and ’24. As per our estimates Gross margin for ’22 and ’23 will be around 25-26%.
Home closing Revenue is expected to increase by double-digit growth% for ‘22 and as per our
projection homes closed will be around 15800 & 17700 by ’22 and ’23 as there is an expected
increase in homes closed prior to covid, from which we estimate home closing revenue to be
$6.23 billion for ’22 and $6.99 billion for ’23.
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Absorption is expected to decrease to just above 4 by ’22 & ‘23 as per management which is
focused on achieving community count of 300 which is expected by mid ’22 where MTH homes
can generate 15,000 orders at a normalized run rate of 50 orders per store, which is just bit over
4 net order per month but contradictory as per our estimates we are expected to see increase in
housing demand in recent years as compared to historical averages suggest so it is hard to tell if
it will be able to achieve the low absorption but as per our estimates it should be around 4.5-5
in ’22 and ’23.
Everything else is in line with previous period, more details are given in the table below.
Historical results
DATA ($)
EPS (basic)
Closing Revenue
Home closing
Gross Margin (%)
Net earnings
EBT
Tangible book
value per share
DPS
Forecast Results
FY2019
6.55
3,650,483
18.88%
FY2020
11.23
4,482,120
21.96%
FY2021
19.02
5,046,726
27.27%
FY2022
23.13
6,230,370
25.81%
FY2023
24.49
6,991,370
25.33%
249,663
302,945
48.8
423,475
533,566
59.5
719,477
932,403
96.4
874,660
1,136,291
142.7
925,978
1,202,569
167.1
(In thousands except eps)
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Current Share price: $115
Price Target by 2023: $217.29 (upside of 88.94%)
Risks
MTH homes depend on continued availability of building materials in order to timely construct the
homes. The availability of these materials can be significantly impacted by a variety of factors outside of
its control. Constraints of raw materials and finished goods or in the distribution channels of its
construction inputs can delay delivery of homes to customers and can increase its building costs or lead
to sales orders cancellations. For example, in 2021, supply chain constraints for various construction
materials related to sustained demand amid the backdrop of a global pandemic have delayed its
construction cycle times. These delays impact the timing of the expected home closings and may also
result in cost increases that it may not be able to pass to current or future customers. Sustained
increases in construction costs may, over time, erode its margins.