Stock Story -
Homebuilder Meritage Homes (NYSE:MTH) announced better-than-expected results in Q2 CY2024, with revenue up 7.6% year on year to $1.69 billion. On the other hand, the company's full-year revenue guidance of $6.2 million at the midpoint came in 99.9% below analysts' estimates. It made a non-GAAP profit of $6.31 per share, improving from its profit of $5.02 per share in the same quarter last year.
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Meritage Homes (MTH) Q2 CY2024 Highlights:
- Revenue: $1.69 billion vs analyst estimates of $1.56 billion (8.6% beat)
- EPS (non-GAAP): $6.31 vs analyst estimates of $5.15 (22.5% beat)
- Full year guidance for EPS (non-GAAP) of $20.40 at the midpoint (1.1% beat)
- Gross Margin (GAAP): 25.9%, up from 23.8% in the same quarter last year
- Free Cash Flow was -$124.9 million, down from $75.75 million in the previous quarter
- Backlog: $1.57 billion at quarter end, down 6.8% year on year (beat)
- Market Capitalization: $7.18 billion
Originally founded in 1985 in Arizona as Monterey Homes, Meritage Homes (NYSE:MTH) is a homebuilder specializing in designing and constructing energy-efficient and single-family homes in the US.
Home BuildersTraditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.
Sales GrowthA company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Thankfully, Meritage Homes's 13.1% annualized revenue growth over the last five years was excellent. This shows it expanded quickly, a useful starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Meritage Homes's annualized revenue growth of 8.5% over the last two years is below its five-year trend, but we still think the results were respectable.
We can dig further into the company's revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Meritage Homes's backlog reached $1.57 billion in the latest quarter and averaged 28.9% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company fulfilled orders at a faster rate than it added new orders to the backlog. This implies Meritage Homes was operating efficiently but raises questions about the health of its sales pipeline.
This quarter, Meritage Homes reported solid year-on-year revenue growth of 7.6%, and its $1.69 billion of revenue outperformed Wall Street's estimates by 8.6%. Looking ahead, Wall Street expects revenue to decline 4.8% over the next 12 months, a deceleration from this quarter.
Operating Margin Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Meritage Homes has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16.2%. This was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it's a show of strength if they're high when gross margins are low.
Analyzing the trend in its profitability, Meritage Homes's annual operating margin rose by 5.7 percentage points over the last five years, showing its efficiency has significantly improved.
In Q2, Meritage Homes generated an operating profit margin of 16.9%, up 2.5 percentage points year on year. This increase was encouraging, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with its general expenses like sales, marketing, and administrative overhead.
EPS Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Meritage Homes's EPS grew at an astounding 34.3% compounded annual growth rate over the last five years, higher than its 13.1% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Meritage Homes's earnings quality to better understand the drivers of its performance. As we mentioned earlier, Meritage Homes's operating margin expanded by 5.7 percentage points over the last five years. On top of that, its share count shrank by 5.6%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Meritage Homes, its two-year annual EPS declines of 2.8% show its recent history was to blame for its underperformance over the last five years. We hope Meritage Homes can return to earnings growth in the future.
In Q2, Meritage Homes reported EPS at $6.31, up from $5.02 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Meritage Homes to perform poorly. Analysts are projecting its EPS of $22.73 in the last year to shrink by 12.8% to $19.83.
Key Takeaways from Meritage Homes's Q2 Results We were impressed by how significantly Meritage Homes blew past analysts' backlog expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates. Additionally, its full-year EPS guidance beat. Overall, we think this was a really good quarter that should please shareholders. The stock traded up 1.5% to $194.50 immediately following the results.
