The share price of Meritage Homes Corporation (MTH) dipped 6% on Oct 29 as poor business in Arizona and California dragged down earnings and revenues in the third quarter of 2014.
The homebuilding company missed the Zacks Consensus Estimate for both earnings and revenues in the quarter.
Third quarter 2014 earnings per share of 79 cents missed the Zacks Consensus Estimate of 90 cents by 12.2% and declined 20% year over year due to weak gross margins.
Total revenue of $556.8 million in the third quarter of 2014 missed the Zacks Consensus Estimate of $585 million by 4.8%. However, revenues were up 13.2% year over year on the back of an increase in home closing revenues and average selling prices.
Quarter in Detail
Meritage’s home closing revenues were $545.5 million, up 13% from the prior-year quarter. Year-over-year growth in home closing revenues was attributable to a 7% increase in the number of homes closed and a 5% hike in average closing prices.
The increase in home closing revenue was driven by a 31% and 53% increase in Central and East Region, respectively, partially offset by an 11% decline in the West region. West region revenues declined due to 15% and 19% declines in California and Arizona markets, respectively. Sales have slowed down in the housing markets of California and Arizona from 2013 and home prices are not growing at par with the increasing cost of land.
Land closing revenue was $11.3 million, up 27% from the prior-year quarter.
Net sales orders rose 15% year over year to 1,500 units during the quarter. The value of Meritage’s net orders rose 21% to $573.6 million. The company had 225 active communities as of Sep 30, 2014, up 26% year over year. The community count included 32 communities from the acquisition of Atlanta-based homebuilder Legendary Communities in Aug 2014.
Meritage’s backlog totaled 2,705 homes as of Sep 30, 2014, up 24% from 2,190 homes as of Sep 30, 2013. The value of backlog grew 30% year over year to $1.04 million in the quarter, owing to stronger demand and a 5% increase in prices.
Meritage’s adjusted home closing gross margin dipped 240 basis points (bps) year over year to 20.4% in the third quarter of 2014 due to higher cost of lots, particularly in the West; impairment charges related to two vintage communities in Tuscan and low margins on Legendary Communities closing.
General and administrative expenses for the third quarter of 2014 increased 20 bps to 5.2, due to expenses related to the acquisition of Phillips Builders and Legendary Communities.
Financial Update
Meritage had cash and cash equivalents of $84.1 million as of Sep 30, 2014 compared with $230.6 million as of Jun 30, 2014.
Outlook for 2014
Meritage Homes raised its expected community count to the range of 230 to 235, up from the prior expectation of 205 to 215 communities by the end of 2014. The company expects gross margin to be around 21% in 2014.
Meritage Homes currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the building and related sector include PGT, Inc. (PGTI), Hovnanian Enterprises Inc. (HOV) and NVR, Inc. (NVR). While PGT sports a Zacks Rank #1 (Strong Buy) Hovnanian Enterprises and NVR carry a Zacks Rank #2 (Buy).
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