The share price of Meritage Homes Corporation (MTH) was up 8.56% on Jan 29, as the homebuilding company reported strong fourth quarter 2014 results.
Meritage Homes’ fourth quarter 2014 earnings per share of $1.19 surpassed the Zacks Consensus Estimate of $1.03 by 15.5%. However, earnings remained flat year over year as strong revenues and lower effective tax rate were offset by weak gross margins.
Total revenue of $698.9 million in the fourth quarter of 2014 missed the Zacks Consensus Estimate of $712 million by 1.8%. However, revenues were up 30.3% 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 $688.3 million, up 29% from the prior-year quarter. Year-over-year growth in home closing revenues was attributable to a 27% increase in the number of homes closed and a 2% hike in average closing prices.
The increase in home closing revenues was driven by a 53% and 40% increase in Central (Texas) and East Region (Florida, the Carolinas and Tennessee) revenues, respectively. Revenues increased 8% in the West region (California, Colorado and Arizona).
Land closing revenues were $10.6 million, up from $2.7 million in the prior year quarter.
Net sales orders rose 12% year over year to 1,272 units during the quarter. The year- over-year increase in orders was driven by a 76% increase in the East. However, the rest of the homebuilding regions witnessed declining orders.
The value of Meritage’s net orders rose 18% to $491 million, as the company witnessed an increase in order value in the West and East regions. As of Dec 31, 2014, the company had 229 active communities, up 21.8% year over year. The community count was however below the company’s expected range of 230 to 235 communities.
Meritage’s backlog totaled 2,114 homes as of Dec 31, 2014, up 14% from 1,853 homes as of Dec 31, 2013. The value of backlog grew 23% year over year to $846.5 million in the quarter, owing to stronger demand and an 8% increase in prices.
Meritage’s home closing gross margin dipped 290 basis points (bps) year over year to 20.3% in the fourth quarter of 2014 due to strong comparison in the prior year quarter.
General and administrative expenses ratio, for the fourth quarter of 2014 improved 40 bps to 4.2%.
Effective tax rate for the fourth quarter 2014 was about 26%, down from 30% in the prior year quarter.
Financial Update
Meritage had cash and cash equivalents of $103.3 million as of Dec 31, 2014 compared with $84.1 million as of Sep 30, 2014.
2014 Earnings
Meritage Homes reported earnings per share of $3.46 for 2014, which surpassed the Zacks Consensus Estimate of $3.30 by 4.9%. Also, earnings increased 6% year over year on strong revenues.
Total revenue of $2.17 billion in 2014 however missed the Zacks Consensus Estimate of $2.19 billion by 0.9%. But revenues were up 19.9% year over year on the back of an increase in home closing revenues.
Outlook
Though future rate hikes could dampen housing activity to some extent, the general market sentiment indicates that homebuilding activity will pick up in 2015 backed by improving job numbers and an upbeat economy.
Housing price gains slowed dramatically in 2014 and are expected to continue the trend in 2015. A big positive, however, is the lower fuel prices that have greatly increased the purchasing power of U.S. consumers. Backing it are the record employment levels. A reduction in fuel costs has given a boost to consumer confidence, which in turn is expected to boost home buying.
As a result, Meritage Homes expects year-over-year increase in orders, closings and revenues in 2015 attributable to strong community count at the end of 2014.
The company expects 2015 home closing gross margin to remain consistent with fourth quarter 2014 levels. The initial quarters of 2015 will witness lower margins, with gradual improvement expected over the rest of the year. The company expects margin to rebound from mid 2015 onwards. The company expects meaningful earnings increase in 2015.
Meritage Homes currently carries a Zacks Rank #4 (Sell).
Other Stocks to Consider
Better-ranked stocks in the building/construction industry worth considering include Headwaters Inc. (HW), USG Corp. (USG) and TRI Pointe Homes, Inc. (TPH). All three companies sport a Zacks Rank #1 (Strong Buy).
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