Friends,
Since Saul’s biggest position is in the home builder LGIH, I thought it would be prudent to think about what the recent results of Meritage Homes might mean for LGIH’s upcoming report.
One of the attractions to LGIH is that it’s making a lot of money but selling at a low price––and yet MTH has an even better ratio:
LGIH p/e = 11.42
MTH p/e = 10.67
Here’s a recent analysis of MTH:
Meritage Homes reported earnings for Q1 2016 and turned in, what I felt, was a pretty good report. It beat on both revenue and earnings and improved operational costs so that net income grew faster than revenue (a good thing). Yet the share price got hammered to the tune of more than 10%. Why? I think it was a combination of three factors. First, gross margins declined. Management had a good explanation for that (higher land and labor costs, primarily) and that’s stuff we’ve known about for some time. Second, orders booked in the quarter for new homes was flat relative to last year, despite having more communities available now (which implies fewer orders per community and therefore a possible slowdown in demand). Third, competitor Beazer Homes (NYSE: BZH) reported a nearly 10% decline in orders booked when it reported Q1 results. That probably doubled (at least) concern about slowing housing demand. Slowing demand = less growth = less valuable company = share price drop. Now, a single quarter and speculation don’t make a trend, but try telling that to traders. It is something to keep an eye on, however.
And this write-up by Jason Hall:
http://newsletters.fool.com/18/coverage/updates/2016/04/28/m…
Why will LGIH be unaffected by the above house-building context, do we think? Should we be worried about an INFN repeat with LGIH? Monkey’s banana stash can’t afford too many of those. Thoughts?
Humbly Yours,
Monkey
Long LGIH
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Their margins have never been what LGIH’s are. DHI’s margins, just to take another random home builder, actually improved in Q1.
Any reason not to think the problem is just with MTH? It strikes me that this might be like comparing Google and Yahoo.
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My understanding is that Meritage sells luxury homes, in addition to its other lines of homes. I don’t believe LGIH does, although I could be wrong about that. So I guess my question is, do we know how much of the negative results Meritage had were attributable to its luxury homes vis a vis its other lines.
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My understanding is that Meritage sells luxury homes,
I wouldn’t call a Meritage home a “luxury” home – at least not by the definition most people would agree to.
Coincidentally, two of my brothers went through the process of building an MTH home two and three years ago (I will resist the urge to describe the umpteen jillion issues they had with the builders or the fact that one of them spent many a night till 3am “fixing all the stuff they screwed up” while building the house). Both of them are very spacious and the rooms are big… but it definitely isn’t luxurious. There were no trim pieces on the walls or doors beyond the factory-made stuff. No opulent or special lighting, countertops, cabinets or other features that I would label “luxury.” Everything “nice” in those homes, they paid for (dearly) as upgrades.
All the houses look the same (giant box with few windows) on the outside, too.
Granted, they may very well have some neighborhoods where they’re building “luxury” homes, but not here in the central NC area.
That all said, they’re very energy-efficient (one of their claims to fame apparently), but from all the discussions I had with both brothers, they aren’t built any better than the standard homes from Beazer, M/I Homes, DR Horton, or KB Homes.
(I own none of LGIH or MTH, by the way, so no axe to grind either way.)
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My understanding is that Meritage sells luxury homes, in addition to its other lines of homes.
Well, LGIH builds all lower-cost, starter homes, targeting apartment dwellers who can qualify for a loan and pay about same or less than they do for rent.
DR Horton is also a larger builder, but has a division that competes directly with LGIH, going after first time buyers and especially millennials - building in technology and flexibility to account for a changing family.
http://www.drhorton.com/Express-Homes.aspx
LGIH also concentrates on lower cost areas, which may keep their land prices more reasonable.
Which, of course, will not disaster proof them. You can buy put spreads around earnings if you are worried 
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Thanks,but I’m not at all worried…I was simply responding to someone else who posted. I was merely making the point that I don’t know that comparing LGIH to Meritage is a fair comparison based upon the different classes of homes each builds.
Thanks again, though.