Scottsdale, Ariz.-based Meritage Homes stock opened lower today, trading down 5.5% at $10.24 at 10 a.m., but it swung to a big gain, along with most of the rest of the home building sector, with the price up 8.5% to $11.76 at 2:45 p.m. It is likely to prove an active trading day for the company in anticipation of full fourth- quarter and year-end results, which will be released after the market closes.

In reaction to the Fed's emergency interest rate cut and other big home builders' earnings announcements, Meritage's stock rallied last week, along with the sector in general. During the past year, the stock has traded from $7.04 to $46.65. When earnings are released, the company is expected to report a loss of $3.52 per share in the fourth quarter.

Facts: In a preview of full financial results, Meritage released a preliminary peek on Jan. 17, and while orders and pricing were weak, unit and dollar closings exceeded analyst expectations.

For the quarter, the company said it anticipates reporting $616 million of closing revenue on 2,139 homes closed and $272 million in net sales on 1,048 homes ordered. Net orders for the quarter were down 12% from the previous year. Results for the year show home building revenues down 25% and closings falling by 18% compared to 2006.

The company said it expects to record $127 million worth of land and joint venture-related impairments, which exceeds analyst expectations. In addition, it's likely the company will write down all of its remaining goodwill of $58 million.

Silver lining: In spite of the charges, the company remains in good standing with all of its covenants and even reduced the debt on its $800 million revolver by $152 million. The debt on the revolver, which has a maturity date in May 2010, now stands at $82 million outstanding.

The company made no hint of expected impairments related to deferred tax assets under FAS 109. Meritage is audited by Deloitte & Touche.

Issues: The company maintains a strong emphasis on optioning land through land banks and that flexibility has proven valuable to date. By leveraging the company's lot-option model, the company renegotiated or opted out of about 6,000 lot purchases under option contracts in the third quarter and reduced total lot supply by 20%. That brought them down 43% from the peak of September of '05. While some analysts expect that the strategy will continue to generate more free cash flow than other land-laden publics, mandatory lot takedown arrangements still create cash flow pressure to turn development and inventory dollars.

Despite softer demand and increasing cancellation rates, the company's credit facility contains restrictive covenants related to tangible net worth and interest coverage and will continue to require additional cash generation.

Meritage maintains a heavy market concentration in both Texas and Arizona. While the Texas market helped offset the plummeting Arizona market last year, Texas slowed down in the back half of 2007 as the availability of non-conforming mortgages dried up. The company has roughly half of its operations in the Lone Star State.

A primary concentration on move-up housing puts new sales at the mercy of buyers who are struggling to offload an existing home in environments replete with inventory overhang.

Despite the company's confidence that it will continue to achieve progress on its financial and operating goals in the coming year, Moody's Investors Service cut the credit ratings on Meritage earlier this month to "B1" from "Ba3" and left the outlook at negative based on concerns that the company will likely report an operating loss in the current fiscal year and leave creditors more exposed.

The company plans to release full earnings today after the market closes, and has scheduled a conference call and Webcast on Jan. 29, 2007, at 8:00 a.m. Pacific Time.