Share price of Meritage Homes Corporation MTH declined almost 4% since the company reported worse-than-expected results in the first quarter of 2015 and provided sluggish outlook for the upcoming quarter 2015. .

Meritage Homes’ first quarter 2015 earnings per share of 40 cents lagged the Zacks Consensus Estimate of 55 cents by 27.3%. Also, earnings declined 35% year over year due to weak gross margins and higher selling, general and administrative expenses.
 

Meritage Homes Corporation - Earnings Surprise | FindTheCompany

However, total revenue of $518.7 million in the first quarter of 2015 surpassed the Zacks Consensus Estimate of $475 million by 9.3%. Revenues were also up 27% 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 $517.3 million, up 27.5% from the prior-year quarter. Year-over-year growth in home closing revenues was attributable to a 20% increase in the number of homes closed and a 6% hike in average closing prices.

The increase in home closing revenues was driven by a 29% and 64% 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 $1.4 million, down from $2.6 million in the prior year quarter.

Net sales orders rose 30% year over year to 1,979 units during the quarter. The value of Meritage’s net orders rose 41% to $782.8 million, as the company witnessed stronger- than-expected housing demand in the spring selling season.

Meritage’s backlog totaled 2,758 homes as of Mar 31, 2015, up 22% from 2,269 homes as of Mar 31, 2014. The value of backlog grew 33% year over year to $1.11 billion in the quarter, owing to stronger demand and a 10% increase in prices.
 
Meritage’s home closing gross margin dipped 430 basis points (bps) year over year to 18.5% in the first quarter of 2015 due to higher cost of lots, unfavorable mix of homes closed and softer home price appreciation. Home closing gross margin decline was also due to purchase accounting adjustments on home closings from Legendary Communities acquired in 2014.

General and administrative expenses ratio for the first quarter of 2015 increased 40 bps to 5.7% owing to the addition of two division offices from Legendary Communities in 2015 and higher expenses.

Guidance for 2015

The company expects home closing revenues to increase in a range of 25% to 30% in 2015. Earnings are expected to be in the range of $3.75-$4.00 per diluted share, being heavily weighted toward the back half of 2015.

Guidance for Second Quarter 2015

The company expects second quarter 2015 earnings in the range of 64 cents – 68 cents,  lower than 85 cents in the prior year quarter.

Meritage Homes currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked stocks in the home-building industry include Toll Brothers Inc. TOL, KB Home KBH and Ryland Group Inc. RYL. While Toll Brothers sports a Zacks Rank #1 (Strong Buy), KB Home and Ryland Group carry a Zacks Rank #2 (Buy).

 

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