With better-than-expected home building EBIT margin and a lower-than-expected tax rate, Meritage beat analysts’ projections on its earnings per share in the second quarter. But UBS analyst Susan Maklari still seemed disappointed with the builder’s quarter.

“These benefits [EBIT margin and tax rate], however, were offset by: slower growth in home building revenues, which rose 18% YOY (+14% in units and 3% in ASP) compared to our estimate of 24% (+21% in units and 3% in ASP) that reduced results by ~$0.04, lower other income was a negative ~$0.01, and higher interest expense was a final negative $0.07 impact to the quarter,” Maklari wrote.

Despite revenues and other income coming in below expectations, Meritage, did notch some gain in the quarter. Here were the key numbers from the company’s release:

  • Net earnings were $29.1 million compared to $35.1 million in the second quarter of 2014.
  • Home closing revenue increased 18% over the prior year’s second quarter, resulting from a 14% increase in home closings and a 3% increase in the average price of homes closed during the quarter.    
  • Home closing gross margin improved sequentially to 19.3% in the second quarter of 2015, up from 18.5% in the first quarter of 2015, though lower than the 21.9% achieved a year ago. The company expects 20% gross margins for the year, though.
  • Total order value grew 25% to $775.8 million in the second quarter of 2015, compared to $618.4 million in the prior year. 
  • Ending backlog value at June 30 was 36% higher in 2015 than in 2014, with 25% more units in backlog and a 9% increase in the average price of orders in backlog.
  • Total orders increased 21% and average sales prices rose 4% year over year.
“Unit orders were +21% YOY (vs. our +25% forecast), as gains in North Carolina (+77%) and Arizona (+34%) were partially offset by weakness in Texas (-12%) reflecting the impact of lower community counts in the state given the more recent uncertainty around demand trends there,” Maklari wrote. “Although community count rose 37% YOY the lower order rates drove absorptions down 12%. We believe the bumps this quarter represent near term constraints and look for operations—and the associated results—to normalize over time.”

Stormy Weather

Some of the challenges in the quarter were beyond Meritage’s control. For instance, heavy rain in Texas and Colorado during the quarter pushed roughly 200 closings into 2016.

“We expect a moderately negative reaction by the stock today, as while 2Q EPS was slightly above our estimate, the street and guidance, orders were below our estimate and we believe investor expectations, while additionally, 2015 EPS guidance was lowered modestly due to closing delays in Texas and Colorado,” wrote J.P. Morgan’s Michael Rehaut.

Looking forward, analysts fear energy problems Texas could be problematic for Meritage. Rehaut estimates Houston and Texas, constituted 15% and 37%, respectively, of the company’s 2014 closings. That was nearly double its coverage universe averages of 8% and 20%.

Maklari also expresses caution going forward. “Despite the results this quarter, we are adjusting our forward estimates to reflect near term challenges… Although we're optimistic about the opportunity set Meritage faces, visibility remains too limited to confidently predict,” Maklari wrote. “In turn, and given our view that the current valuation already incorporates the likely path of future earnings, our $39 price target and neutral rating are unchanged.”