Meritage Homes Prepares For First-Time Homebuyers, Hopeful On Arizona

When Meritage Homes (MTH) lowered guidance on September 9, 2015, the nation’s seventh largest homebuilder blamed several factors:

A delay in closing homes. This was the most concerning explanation because the company provided no further details on it.

Increased labor costs. These costs impacted margins. The problem was particularly acute in MTH’s major markets of Colorado and Texas where severe weather created a backlog of work for subcontractors. The good news on these pressures was a confirmation of the strong housing markets in those areas.

Slower business than expected from newer divisions in the Southeast. This explanation was a bit mysterious but was explained better in an investor conference as slower than expected integration of new acquisitions. I cover the rest of the investor conference below.

This news was quite a turn from the way MTH bullishly started the year with a pre-announcement of exceptionally strong sales. The stock gapped down 8.9% on the latest news and was down even further for a bit.

Meritage Homes (MTH) has started to recover from September’s selling

Source: FreeStockCharts.com

The chart above shows that MTH has started to recover from September’s earnings warning. The stock is now at a critical point as it trades just below the downtrending 50-day moving average (DMA) which has served as resistance since August. However, the stock may have bottomed right at the time of the Deutsche Bank 23rd Annual Leveraged Finance Conference on September 29 with a retest of the intraday low from the earnings warning. At the conference, MTH elaborated on its guidance and provided its outlook for the housing market. Importantly, MTH stuck by its bullish outlook and promised analysts that it will turn around the negative factors that drove the company to warn ahead of the conference.

Like all homebuilders, MTH believes that the housing market is still in the early stages of a recovery. The company juxtaposes very familiar housing data that is still barely off what would have been called recession levels in previous cycles versus the strong employment profile of the U.S. economy. I have increasingly heard that household formation is finally showing signs of life (I am still looking for the hard data). MTH pointed to this development of “green shoots” over the past 3 to 4 quarters as support for its expectation of strong demand to come.