Understanding Meritage Homes’ Risk Factors

Public homebuilder Meritage Homes Corp. (MTH) provides homes in the U.S. with a focus on entry-level and first move-up buyers. It recently delivered better-than-expected third-quarter Fiscal 2021 results.

Let’s have a look at MTH’s third-quarter performance and understand what has changed in its key risk factors that investors should know.

Revenue increased 10.7% year-over-year to $1.26 billion, outperforming estimates by $74.6 million. During this period, MTH delivered 3,112 homes, as compared to 3,004 homes a year ago. Significantly, the average sales price of home closings increased 7% year-over-year to $402 thousand.

The CEO of MTH, Phillippe Lord, said, “The housing market remained solid. The continuing demand stemmed from market conditions related to historically-low interest rates and limited housing supply. It also resulted from home-buying activity from millennials and baby boomers, the largest groups fuelling demand over the last few quarters.

“We believe these underlying demographic factors will not fundamentally change in the near future but maybe bumpy if interest rates move materially in a short amount of time.” (See Insiders’ Hot Stocks on TipRanks)

Furthermore, home closings gross margin jumped 820 basis points to 29.7% due to pricing power and leveraging of fixed costs on a larger home closing revenue that offset increases in lumber and other commodity costs.

Consequently, earnings per share jumped to $5.25 from $2.84 a year ago, outperforming estimates by $0.80. For full-year 2021, MTH anticipates home closing revenue of $5.05 billion to $5.15 billion on projected home closings of 12,600 to 12,900. Earnings per share are expected to be in the range of $18.75 and $19.40, indicating an increase of over 70% over the previous year.

On October 29, Evercore ISI analyst Stephen Kim reiterated a Buy rating on the stock with a price target of $190. Kim noted, “MTH executed extremely well during the quarter, surpassing their July closings guide amidst worsening material shortages, and achieving standout profitability.”

Consensus on the Street is a Strong Buy based on 4 Buys and 1 Hold. The average Meritage Homes price target of $152 implies upside potential of 39.8%.

Now, let’s look at what has changed in the company’s key risk factors.

According to the new Tipranks’ Risk Factors tool, MTH’s top risk category is Production, which accounts for 37% of the total 30 risks identified. In its recent third-quarter report, the company has added one key risk factor under the Production risk category.

MTH highlights that it depends on the continuous availability of building materials to construct homes timely. Any supply shortages or other risks associated with demand for building materials could significantly disrupt its operations and increase costs. Additionally, a sustained increase in construction costs may over time wipe off MTH’s margins.

The Production risk factor’s sector average is at 20%, compared to MTH’s 37%. Shares are up 32.4% so far this year.