Meritage Homes reports strong order growth and pricing power in their markets
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Meritage builds homes in the Carolinas, Arizona, California, Texas, Nevada, Colorado, and Florida. Their typical price point is in the high $200s / low $300s. They typically purchase enough land for a 5 year supply so they are exposed to increasing / decreasing land prices. Meritage has a product focus on green construction and senior living. They don’t do their own mortgage origination, but they have relationships with several mortgage brokers.
Meritage Homes reported better than expected Q1 earnings with volume and pricing growth
Meritage Homes reported first quarter earnings per share of 32 cents, well ahead of the Street estimate of 25 cents and raised their full year outlook to $2.20 – $2.45 a share. The Street estimate for FY2013 was $2.04. Closings increased 39% and closing revenue increased 62%. Average selling prices were up 17%, which speaks to the strength of their geographical concentration.
Orders were up 35%, with a dollar value increase of 69%. Backlog increased 51% and is up 89% in dollar terms. This translates to an average sales price increase of 25%. Backlog was this highest since 2008. Gross Margins increased by 210 basis points to 19.5%. Regarding pricing, Meritage CEO and Chairman Steven Hilton said “Housing demand is greater than the supply of homes available for sale in many of the areas where we operate, causing home prices to increase.”
Implications for the other homebuilders
So far, we have heard from Lennar (LEN), KB Homes (KBH), NVR (NVR), and Meritage (MTH). All except NVR reported strong earnings and pricing growth. It is becoming apparent that it really is a tale of two geographical areas, with the West and the South experiencing strong volume and pricing growth, while the Northeast and the Midwest are lagging. We are still waiting to hear from Ryland (RYL), D.R. Horton (DHI) and Pulte (PHM).
The macro winds are definitely at the back of the homebuilders. We are finally seeing housing formation growth at long last. Although the new households are more renters than homebuyers, this is the first step. Household formation has been depressed since the recession began due to a difficult job market. Many college grads ended up moving back home or moved in with roommates. Household formation was not depressed due to demographics, which means that represents pent-up demand. That pent-up demand will be unleashed as the economy and job market recovers, which will buoy the homebuilders in the years ahead.