On Thursday, Goldman Sachs raised its outlook for Meritage (NYSE:MTH) Homes Corporation (NYSE:MTH) stock, shifting its rating from Neutral to Buy and increasing the price target to $235 from $205. The Goldman Sachs analyst highlighted Meritage Homes' strategic position to benefit from the housing market dynamics over the next 12-18 months. The upgrade is based on the expectation that new homes will make up a larger share of total housing transactions.
The analyst's commentary pointed out that with the 30-year mortgage rate predicted to end 2025 at 6.05%, and the current average rate on outstanding mortgages at 6.54%, compared to 4.11% in the second quarter, homeowners with rates at or below 4% might find moving less appealing. This situation potentially benefits Meritage Homes, which specializes in offering quick close, move-in ready new homes, positioning it for above-average growth compared to existing home units.
The analysis suggests that Meritage's approach could lead to an increase in return on equity (ROE) by approximately 70 basis points to 14.8% through 2025, up from 14.1% last year. This improvement is expected to narrow the performance gap with its peers by roughly the same margin, which could support the upside potential in Meritage's stock value.
Meritage Homes' stock has seen a modest year-to-date (YTD) increase of 2%, which stands in contrast to the average growth of 21% for its peer group. The company's stock is currently trading at 1.2 times forward tangible book value (TBV), reflecting its market performance relative to its tangible assets. The analyst's upgrade suggests confidence in Meritage Homes' market strategy and its potential for growth in the coming years.
In other recent news, Meritage Homes Corporation displayed a notable performance in the third quarter of 2024, despite the turbulence in the market due to fluctuating mortgage rates and external factors. The company's focus on affordable, ready-to-move-in homes has led to a significant backlog conversion rate and an increase in home deliveries. Additionally, Meritage Homes announced the acquisition of Elliott Homes, which is anticipated to strengthen its presence in the Gulf Coast markets and contribute positively to future growth.
The company recorded 3,512 home orders and delivered 3,942 homes in Q3 2024, with home closing revenue reaching $1.6 billion and a gross margin of 24.8%. However, the average selling price dropped by 6% year-over-year to $406,000. The company also received the EPA's 2024 Indoor AirPLUS Leader Award and retained its Great Place to Work certification.
Looking ahead, Meritage Homes expects the community count to surpass 300 by the end of 2024 and aims to achieve 20,000 units in three years. The company projects Q4 2024 closings between 3,750 and 3,950 units, with home closing revenue anticipated to be between $1.5 billion and $1.59 billion. For the full year 2025, the company expects closings to be between 16,500 and 17,500 units with home closing revenue ranging from $6.7 billion to $7.1 billion. These developments are part of the recent news surrounding Meritage Homes Corporation.
InvestingPro Insights
The Goldman Sachs upgrade aligns with several key metrics and insights from InvestingPro. Meritage Homes Corporation (NYSE:MTH) is currently trading at a P/E ratio of 8.17, which InvestingPro Tips identifies as "trading at a low earnings multiple." This valuation could suggest potential upside, supporting Goldman's bullish stance.
Despite the modest 2% year-to-date increase mentioned in the article, InvestingPro data shows a strong 57.98% one-year price total return, indicating significant momentum over the past year. This performance, coupled with the company's high return over the last decade, as noted in another InvestingPro Tip, reinforces the long-term growth potential highlighted by Goldman Sachs.
The company's financial health appears solid, with InvestingPro Tips pointing out that "liquid assets exceed short term obligations" and it "operates with a moderate level of debt." These factors could contribute to Meritage Homes' ability to capitalize on the housing market dynamics discussed in the Goldman Sachs analysis.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Meritage Homes, providing a deeper understanding of the company's financial position and market performance.
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