Meritage Homes Corporation (MTH) reported impressive second-quarter 2024 results, with earnings and total closing revenues topping the Zacks Consensus Estimate and growing year-over-year. The company's strategic focus on delivering quick-turning, affordable move-in-ready homes has resonated well with homebuyers, driving robust demand and strong financial performance.

In the second quarter of 2024, Meritage Homes reported net income of $231.6 million, or $6.31 per diluted share, up from $186.8 million, or $5.02 per diluted share, in the prior-year quarter. For the first half of 2024, net income reached $417.6 million, or $11.37 per diluted share, compared to $318.1 million, or $8.56 per diluted share, in the first half of 2023. The strong profitability was driven by a 12.7% increase in home closing revenue to $3.16 billion in the first six months of 2024, up from $2.85 billion in the same period last year.

The company's focus on entry-level and first move-up homes, coupled with its all-spec building strategy, has enabled it to capitalize on the persistent housing supply shortage and strong homebuyer demand. In the second quarter, Meritage Homes reported 4,118 home closings, up 18.0% from 3,490 in the prior-year period. For the first half of 2024, home closings totaled 7,625, a 19.4% increase from 6,387 in the first half of 2023.

The company's home closing gross margin expanded 240 basis points to 25.9% in the first half of 2024, compared to 23.5% in the same period last year. This improvement was driven by lower direct costs, greater leverage of fixed expenses on higher revenue, and shorter construction cycle times, which were partially offset by higher lot costs.

Meritage Homes' financial services segment also contributed to the strong quarterly performance, with profit of $4.8 million in the second quarter of 2024, compared to a loss of $2.6 million in the prior-year period. The improvement was primarily due to higher home closings volume and a decrease in charges related to unused interest rate forward commitments.

On the operational front, Meritage Homes' average absorption pace increased 15.4% to 4.5 net sales per month in the second quarter of 2024, up from 3.9 in the prior-year period. The company's entry-level homes represented 92% of total orders in the second quarter, up from 85% a year ago, reflecting the strong demand for affordable housing.

The company's backlog decreased 28.0% to 2,714 homes as of June 30, 2024, compared to 3,772 homes a year earlier. However, this was a result of the company's higher backlog conversion rate of 135.8% in the second quarter of 2024, up from 89.0% in the prior-year period. The increase in backlog conversion was driven by a higher percentage of spec homes sold later in the construction cycle.

Meritage Homes ended the second quarter of 2024 with 287 active communities, down from 291 a year earlier but up sequentially from 275 at the end of the first quarter. The company purchased approximately 8,900 lots for $477.1 million and spent $584.3 million on land development during the first half of 2024, as it continues to invest in future growth.

The company's balance sheet remains strong, with $992.9 million in cash and cash equivalents as of June 30, 2024, up from $921.2 million at the end of 2023. Meritage Homes' total debt to capital ratio was 21.2% as of June 30, 2024, compared to 17.9% at the end of 2023, while its net debt to capital ratio was 6.2%, up from 1.9% at the end of 2023.

Looking ahead, Meritage Homes has raised its full-year 2024 guidance. The company now expects to close between 14,750 and 15,500 homes, up from the prior range of 14,500 to 15,000 homes. Home closing revenue is expected to be in the range of $6.1 billion to $6.3 billion, up from the previous guidance of $6.0 billion to $6.2 billion. Home closing gross margin is still expected to be in the 24.5% to 25% range, compared to 24.9% in 2023. The company also raised its diluted earnings per share guidance to $19.80 to $21.00, up from the prior range of $19.20 to $20.70.

Meritage Homes' strategic focus on delivering affordable, move-in-ready homes has positioned the company well to capitalize on the persistent housing supply shortage and strong homebuyer demand. The company's robust financial performance, strong balance sheet, and increased guidance demonstrate its ability to execute its strategy and create long-term value for shareholders.

Business Overview

Meritage Homes is a leading designer and builder of single-family attached and detached homes, primarily serving the first-time and first move-up homebuyer segments. The company operates in three regions: West, Central, and East, which encompass 10 states: Arizona, California, Colorado, Utah, Texas, Florida, Georgia, North Carolina, South Carolina, and Tennessee.

The company's strategic evolution over the past several years has focused on streamlining its operations and shifting towards a lower average sales price (ASP) and all-spec building strategy. This approach has enabled Meritage Homes to effectively compete with the resale market by offering quick-turning, move-in-ready homes that cater to the needs of its target buyer demographics.

Meritage Homes' new strategy is built on three core tenets: a 60-day closing guarantee, the concept of move-in-ready homes, and a focus on deepening its realtor relationships. This strategy has resonated well with homebuyers, as evidenced by the company's strong sales orders and backlog conversion rates in the second quarter of 2024.

Financials

In the second quarter of 2024, Meritage Homes reported total closing revenue of $1.69 billion, up 9.8% from $1.54 billion in the prior-year period. This increase was driven by an 18.0% rise in home closing volume to 4,118 homes, partially offset by a 7.0% decrease in ASP to $411,300 due to product and geographic mix shifts.

For the first half of 2024, total closing revenue reached $3.16 billion, a 12.7% increase from $2.85 billion in the first half of 2023. Home closing revenue grew 12.7% to $3.16 billion, while land closing revenue decreased from $41.8 million in the first half of 2023 to $2.3 million in the first half of 2024.

Meritage Homes' financial services segment, which includes the company's title, escrow, and mortgage operations, reported a profit of $4.1 million in the first half of 2024, compared to a profit of $0.4 million in the first half of 2023. The improvement was primarily due to higher home closings volume and a decrease in charges related to unused interest rate forward commitments.

Liquidity

As of June 30, 2024, Meritage Homes had $992.9 million in cash and cash equivalents, up from $921.2 million at the end of 2023. The company's total debt to capital ratio was 21.2% as of June 30, 2024, compared to 17.9% at the end of 2023, while its net debt to capital ratio was 6.2%, up from 1.9% at the end of 2023.

During the first half of 2024, Meritage Homes spent $1.1 billion on land acquisition and development, up from $0.7 billion in the first half of 2023, as the company continues to invest in future growth. The company also paid $54.5 million in dividends during the first six months of 2024, up from $19.9 million in the same period last year.

Outlook

Meritage Homes has raised its full-year 2024 guidance. The company now expects to close between 14,750 and 15,500 homes, up from the prior range of 14,500 to 15,000 homes. Home closing revenue is expected to be in the range of $6.1 billion to $6.3 billion, up from the previous guidance of $6.0 billion to $6.2 billion. Home closing gross margin is still expected to be in the 24.5% to 25% range, compared to 24.9% in 2023. The company also raised its diluted earnings per share guidance to $19.80 to $21.00, up from the prior range of $19.20 to $20.70.

Risks and Challenges

While Meritage Homes has demonstrated strong performance, the company faces several risks and challenges, including:

1. Volatility in mortgage interest rates and its impact on affordability and demand. 2. Potential supply chain disruptions and labor shortages that could affect construction costs and cycle times. 3. Increasing competition from other homebuilders and the resale market. 4. Potential changes in government regulations and policies that could impact the homebuilding industry. 5. Exposure to macroeconomic conditions and their effect on consumer confidence and housing demand.

Conclusion

Meritage Homes' strong second-quarter and first-half 2024 results demonstrate the success of its strategic evolution towards delivering affordable, move-in-ready homes. The company's focus on the first-time and first move-up homebuyer segments, coupled with its all-spec building strategy, has enabled it to capitalize on the persistent housing supply shortage and robust demand environment.

Meritage Homes' improved financial performance, strengthened balance sheet, and increased guidance for 2024 highlight the company's ability to execute its strategy and create long-term value for shareholders. While the company faces various risks and challenges, its strategic positioning, operational efficiency, and financial discipline position it well to navigate the current market environment and continue its growth trajectory.