Meritage Homes Corporation (NYSE: MTH) late Tuesday reported net income of $69.8 million ($1.79 per diluted share) for the third quarter of 2019 ended September 30. The gain compares to $54.1 million ($1.33 per diluted share) for the third quarter of 2018. Wall Street was looking for a gain of $1.50 per share.
Among the results for the quarter:
- Total orders for the third quarter of 2019 increased 24% year-over-year, driven by a 27% year-over-year increase in absorptions, primarily due to higher demand for Meritage’s entry-level priced LiVE.NOW. product. Absorptions were up 29% in the West, 26% in the Central and 23% in the East region, demonstrating broad strength across all regions. As a result of the company's strategic product shift, average sales price (ASP) on orders was 3% lower year-over-year.
- The 35% increase in diluted EPS reflected the combination of increases in home closing revenue, gross margins and greater overhead leverage, in addition to a 4% reduction in diluted shares after share repurchases in the fourth quarter of 2018 and first quarter of 2019. Third quarter 2019 pre-tax earnings increased 180 bps to 9.8% compared to 8.0% in 2018.
- The 7% increase in home closing revenue for the quarter reflected a 12% increase in home closing volume, which was partially offset by a 4% reduction in ASP due to the shift in product mix, compared to the third quarter of 2018. The East region led with home closing revenue up 15% year-over-year, followed by a 9% increase in the Central region, while closing revenue in the West was flat.
- Home closing gross margin improved 170 bps to 19.8% from 18.1% a year ago, contributing to a 17% increase in total home closing gross profit over the prior year's third quarter. Third quarter 2018 gross margin was reduced by 30 bps due to a $2.6 million impairment from exiting a move-up community that was no longer aligned with the company's strategy.
- Selling, general and administrative expenses (SG&A) totaled 10.7% of third quarter 2019 home closing revenue, compared to 11.0% in the third quarter of 2018.
- Interest expense increased $1.0 million year-over-year, as less interest was capitalizable to assets under development due to shortened construction cycles and higher inventory turnover.
- Cash and cash equivalents at September 30, 2019 totaled $454.8 million, compared to $311.5 million at December 31, 2018, reflecting positive cash flow from operations. Real estate assets grew $111.3 million year-to-date to approximately $2.9 billion at September 30, 2019 to support further growth.
- Meritage ended the third quarter of 2019 with 37,300 total lots owned or under control, compared to approximately 34,400 total lots at September 30, 2018. Approximately 81% of the lots added year-to-date 2019 were in LiVE.NOW. communities for entry-level homes.
- Debt-to-capital ratios decreased to 41.1% at September 30, 2019 from 43.2% at December 31, 2018, with further improvement year-to-date in the net debt-to-capital ratio of 31.3% from 36.7% at year-end 2018.
“Our results for the third quarter demonstrated continued strong demand for our homes, as well as the impact of operating efficiencies that are enabling us to improve our margins while selling homes at affordable prices," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “Our total orders for new homes increased 24% year-over-year in the third quarter, as a result of higher absorptions on slightly lower community count.
“We’re clearly in the sweet spot of the market with our LiVE.NOW.® homes for value-conscious buyers,” he explained. “Those homes are selling at a significantly higher pace than move-up homes and made up 54% of our third quarter orders, compared to 43% a year ago.
“In addition to our success with LiVE.NOW. in the entry-level market, our first move-up business is also doing well. We have nearly completed the roll-out of our new Studio M design centers, which have been very well received by our move-up buyers," he continued. “The new studios are benefiting both our margins and overhead leverage by providing additional revenue at a reduced cost due to streamlining and simplifying our operations. The combination of revenue growth and improved operating margin drove a 29% increase in our net earnings for the third quarter.”
Hilton concluded, “We are confident in our strategy and execution, and are encouraged by healthy employment levels in the U.S., growing household incomes and low interest rates, which are allowing more people to own their own homes. Based on our results in the first three quarters of 2019, we are projecting 8,900-9,100 total home closings for the year, generating approximately $3.5 billion of total home closing revenue with home closing gross margin in the mid to high-18's percent range for the year, which should translate to approximately $5.50-5.70 in diluted earnings per share.”
