With four public builders already posting what many in the industry would consider better than expected 2Q2009 results, the trend is mostly expected to continue when Meritage Homes releases its most recent earnings report after market close today. Wall Street analysts expect an average loss of $0.72 a share on revenues of approximately $210.6 million, compared to a $0.79 per share loss on $375.3 million in revenues it experienced a year ago.
Driving an earnings improvement, despite significant revenue erosion, likely will be the company's land strategy, which focuses on optioned land; its heavy concentration in Texas markets, which accounted for 66% of 1Q2009 orders, according to Credit Suisse analyst Dan Oppenheim; and its low debt levels, with no long-term maturities until 2014.
Also contributing to the company's expected profitability improvement should be its retooling of product in key markets. The most visible example of the kind of lift the smaller, more affordably priced, and cheaper and faster to build product is giving local divisions is the recent success that the company's Phoenix division experienced at its Lakes at Rancho El Dorado community following the launch of its "presidential" series of homes. (Get more details about the new product roll-out at the community here.)
However, the retooled products' selling strategy, which squarely focuses on selling monthly payments, highlights the company's potential vulnerability to fluctuation in interest rates, which have been inching up in recent weeks. In a recent research note, Wells Fargo analyst Carl Reichardt indicated that determining the company's susceptibility to shifting interest rates will be one of his key questions for Meritage management during the company's earnings call Tuesday morning. He wrote:
"We'd like to determine the sensitivity of customers to the volatility in interest rates. Sales managers (and some builder mgmts) have commented that lack of spec inventory is costing sales as buyers are nervous about whether they have a workable interest rate at closing should they need to wait for construction."
Other key issues that Meritage executives likely will have to address during the call include:
Appraisals. In recent weeks, builder criticism over the new Home Valuation Code of Conduct has reached a fever pitch. Many builders complain that the new regulations are causing appraisers to undervalue new homes. Consequently, many builders are forced to either capitulate further on price or cancel the sale. (To see some real-life examples of the issues builders are having with appraisals, click here.)
At the close of 1Q2009, many big builder executives indicated that they were starting to see some movement in the land market. In fact, during its 1Q2009 call, Meritage CEO Steve Hilton said the company recently had purchased a note from a bank on 80 lots in Arizona at a cost of roughly $35,000 per lot, compared to an original cost of $190,000 per lot. He also said, "I think there is going to be a lot more opportunities. I think the opportunities are accelerating. I think there is a lot of private builder assets there getting disposed through banks, and we think they are going to accelerate through the later part of this year and we are going to have some good choices out there to make."
No doubt analysts will be anxious to hear whether the company has entered into any more new land deals. The size of the company's appetite for new land both indicates that land prices could be stabilizing and suggests that the company could have a sales advantage going forward by being able to bring new, more affordable product to market on these low-cost lots.