Meritage Homes Corporation MTH is benefiting from a strategic focus on delivering affordable, move-in-ready homes with quick turnaround times. The company’s emphasis on attracting entry-level and first-time move-up buyers has been driving consistent performance and supporting long-term growth. However, increased lot costs and high mortgage rates are concerning.

The homebuilding industry is facing challenges like high mortgage rates and rising costs. As of Dec. 26, 2024, mortgage rates increased for the second consecutive week, with the 30-year fixed-rate mortgage at 6.85%, up 13 basis points (bps) from the previous week and 24 bps from last year’s average of 6.61%.

Shares of this Scottsdale, AZ-based homebuilding company have lost 7.8% in the past year against the Zacks Building Products - Home Builders industry’s 1.5% growth.

That said, a slight improvement in new and existing home sales is encouraging. There is growing optimism fueled by the potential for declining Federal Reserve interest rates and a robust employment landscape. These factors are likely to improve affordability and drive higher home purchase activity in the year ahead.

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Let us discuss the factors favoring this Zacks Rank #3 (Hold) stock.

Factors Acting in Favor of Meritage Homes

Solid Spec Home Strategy: Meritage Homes has been effectively leveraging its solid spec home strategy to meet growing demand by offering move-in-ready homes with desirable features and a quicker turnaround time compared with traditional homebuilding. This approach also supports a lower average selling price, stimulating demand in the market.

Strong demand for the company’s quick-turn, move-in-ready homes and continued use of financing incentives generated a third-quarter average absorption pace of 4.1 net sales per month, above its target average annual sales pace of 4 net sales per month. As of Sept. 30, 2024, Meritage Homes had approximately 6,800 spec homes in inventory, up 38% year over year.

Home closings volume rose 8% year over year in third-quarter 2024. The cancelation rate was 10%, below its historical average in the mid-teens. Solid execution on its spec building and streamlined strategy helped the company achieve yet another record backlog conversion rate of 145% and a return on equity of 17.2% as of Sept. 30, 2024.

Focus on Entry-Level Buyers for Long-Term Growth: The company remains focused on meeting the growing demand for entry-level homes, addressing the need for affordable housing amid rising prices and interest rates. Its strategy of building homes for entry-level and first-move-up buyers continues to gain traction and is expected to drive long-term growth.

Entry-level buyers represented 93% of home closings in the third quarter compared with 86% in the year-ago period. Also, entry-level represented 92% of sales orders compared with 88% in the prior year. By focusing on high-demand communities, the company aims to increase its market share, especially with the growing interest from millennials, Gen Z and move-down baby boomers. This focus on affordability and scalability is positioned to support sustained performance and higher sales volumes in the future.

Strategic Land Acquisition: Meritage Homes invests aggressively in land acquisition and development, which is critical for community count as well as top-line growth. In third-quarter 2024, Meritage Homes accelerated its investment in internal growth with $659 million spent on land acquisition and development, up 23% from a year ago.

At September 2024-end, 74,800 lots were owned or controlled by the company (equating to a 4.8-year supply) compared with 60,700 lots a year ago. Meritage Homes expects land spend of $2-$2.5 billion in 2024 and similar in 2025 as the company develops its land and ramps up lot portfolio for community count growth.

Trading at a Discount: From the valuation point of view, with a forward 12-month price-to-earnings ratio of 7.2X, below the industry average of 9.5X, the stock presents a potentially attractive valuation for investors seeking exposure to the housing industry.

Risks for Meritage Homes Stock

Decline in Orders and Backlog: The company experienced a decline in both orders and backlog during the third quarter of 2024, indicating a challenging market environment. Net new home orders decreased 5% in dollar value, with only a modest 1% increase in units. The average selling price (ASP) also dropped 6% to $406,000, due to the shifts in geography and product mix. Additionally, the backlog was down 37% year over year, leading to a 40% decrease in potential housing revenues from the backlog, which fell to $931.7 million.

Higher Costs and Margin Pressure: Meritage Homes is facing higher costs and margin pressures due to labor shortages, rising land prices and increased material costs. In the third quarter of 2024, the adjusted home closing gross margin contracted 190 bps year over year to 24.8%. This decline was primarily caused by higher lot costs, increased use of financing incentives and reduced leverage on fixed costs due to lower home closing revenues.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector are:

Sterling Infrastructure, Inc. STRL presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

It delivered a trailing four-quarter earnings surprise of 21.5%, on average. Shares of STRL have gained 44.7% in the past six months. The Zacks Consensus Estimate for STRL’s 2025 sales and EPS implies an increase of 7.3% and 8.1%, respectively, from the prior-year levels.

Weyerhaeuser Company WY currently flaunts a Zacks Rank of 1. WY delivered a trailing four-quarter earnings surprise of 41.6%, on average. The stock has gained 4% in the past six months.

The consensus estimate for WY’s 2025 sales and EPS indicates an increase of 7.9% and 72.8%, respectively, from a year ago.

MasTec, Inc. MTZ presently sports a Zacks Rank of 1. MTZ delivered a trailing four-quarter earnings surprise of 40.2%, on average. The stock has gained 32.6% in the past six months.

The Zacks Consensus Estimate for MTZ’s 2025 sales and EPS indicates an increase of 8.8% and 43.4%, respectively, from a year ago.

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