Meritage reported 18Q1 diluted EPS of $0.65 per share, down from $1.07 last year, but a penny ahead of consensus estimates. Home closing revenue declined 4% to $698.7 million, as a 2% increase in unit closings was more than offset by a 6% decline in the average selling price to $396,000. The decline in the average selling price was due mostly to a shift in mix to a higher proportion of entry level homes.
Meritage’s operating margin, which I define here to include financial services profits and other income, declined by 150 basis points to 5.1%. Homebuilding gross margin slipped 10 basis points to 16.5%, but the SG&A expense ratio increased by 90 bps to 12.1%. The increase in SG&A expense was due to higher brokerage commissions and severance expense, as well as an acceleration in equity compensation expense (sparked by changes in tax rules). The balance of the drop in operating margin was due to a sharp decline in other income, as a result the non-repeat of last year’s $4.8 million legal settlement.
Despite the decline in operating profit, management remained upbeat in its outlook for the rest of the year. In the quarter, it reported a 7.3% increase in unit orders, mostly of lower-priced entry level homes. It now anticipates that unit closings will be roughly in line with last year, revenues will probably be down due to the lower average selling price, but operating margins will improve during the balance of the year. It’s EPS guidance for 2019 is $4.65-$4.95, which represents a decline from last year’s $5.62; but that is slightly higher than the current consensus estimate of $4.56.
Meritage’s stock has rallied on the earnings report and is now trading at a 52-week high. From a technical perspective, the stock has been in an uptrend since it bottomed at about $32 in October. With the recent rally, MTH is now valued at 10.6 times the midpoint of its 2019 EPS guidance range of $4.80. At that relatively low multiple, it still has upside potential. The stock could run into some resistance as it approaches $55, which is the post-financial crisis high achieved in late 2017.
April 29, 2019
Stephen P. Percoco
Lark Research
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