Meritage Homes' main goals for 2010 are to return to profitability and stay there. So far, so good. The company reported $4.2 million in net earnings, its second profitable quarter for 2010 on Tuesday.
The staying there part might be tougher, CEO Steve Hilton told analysts Wednesday.
"I do [think the company will continue to turn a profit in 2010], but I certainly believe it will be modest," he said. "Sales have been modest, and it will be harder to be profitable in the second half of the year than we thought."
A more precipitous drop in sales after the federal tax credit expired was "surprising," Hilton said, "because we didn't experience a significant increase in spring sales until the last few weeks of April. However, we are hopeful for a relatively short hangover effect similar to what the auto industry experienced with the 'cash for clunkers' program."
Hilton said he expects lower third quarter closings with improvements at the end of the year.
But the company's first half was exemplary, its $4.2 million ($0.13 per share) in earnings for the second quarter contrasted sharply with the loss of $11.9 million ($2.37 per share) in the same quarter of last year.
The gain came the old-fashioned way; the company closed 1,207 houses, 36% more than the 890 it closed in the same quarter of last year. And the average sales price was up, too, from $220,414 to $291,405.
Gross margins also improved to 18.3% from 12.3%, excluding impairments. Of help is the ever-increasing number of new communities comprised of cheaper land in the company's mix. Roughly 20% of the second quarter closings came from the newer communities.
Meritage beefed up its spec home inventory to take advantage of the home buyer tax credit. Roughly 40% of its second quarter sales were of spec homes. The quarter ended with the 580 spec homes on the books, roughly 3.9 per community. "We are comfortable with the level of specs we currently carry in our communities," said Hilton.
Hilton said the company began to increase incentives near the end of the second quarter to compensate for the tax credit expiration, bringing questions from analysts about whether incentives are likely to increase more and eat into margins.
"We are incentivizing certain communities to maintain certain volume level so we can at least leverage some of our overhead," Hilton said. "We are being very careful not to dramatically cut prices across the board."
Hilton said the company needs to sell somewhere between 800 and 850 homes a quarter under current conditions to break even, depending on the product mix and sale prices.
While still responsible for 51% of Meritage's sales, the Texas market has become a smaller share of the company's business as absorption rates in its California and Florida markets have grown. That mix has helped the company because Texas sales prices tend to be lower than either California or Florida.
"We are very focused on maintaining our market share in Texas even though we are diversifying," said Hilton.
Another strong focus for Meritage is growing community counts as it keeps a smaller land inventory than many builders. It bought 1,100 lots during the second quarter. Since the beginning of 2009, it has contracted for more than 8,800 new lots and now controls about 14,450 lots, a 3.4-year supply based on current closings.
Hilton said the company is still able to buy new lots at prices that result in good margins, but there also haven't been large price cuts. Don't look for Meritage to go into the business of setting up another company to manage FDIC assets as Lennar and Toll Brothers have done.
"Those FDIC deals include a lot of things that generally we are not interested in," said Hilton. "We would like to get pieces of some of those deals, but it's probably not our strategy at this point in time to form an entity to pursue those types of deals."