Meritage & Entry Level

One more. From a Fool article by Jim Mueller about Meritage Homes, LGIH’s success is not lost on Meritage;

snip

…Here’s what I found important. First, for the quarter, revenue increased 11% due to a 3% increase in the number of homes closed and an 8% increase in the average sales price (ASP) per home. More important, though, was that home orders grew a very nice 29%, most of which was from more volume being ordered. As CEO Steven Hilton said on the conference call, there doesn’t seem to be a sign of recession, at least in the housing market. Data from Canadian National Railway’s (NYSE: CNI) fourth quarter supports that, as it reported strong levels of lumber and paneling shipments in its fourth quarter.

Second, the big slowdown seen in Colorado and Texas last year thanks to the severe weather is mostly over. As expected, the contractor market has expanded to take up the demand (from all homebuilders, not just Meritage). There’s still some higher labor pricing, however, which will continue to put a bit of pressure on the company’s margins.

Third and related to the above, the popular view is that Houston is a lost cause, thanks to lower home-buying interest due to low oil prices. Not so fast, says Meritage. Yes, Houston is tough right now, but December was actually quite strong and several new communities “performed exceptionally well” in the quarter according to Hilton. The company is also working to build more entry-level homes in the Houston area to boost demand.

Fourth is another problem region, the eastern region and especially Atlanta and Nashville. This area is seeing early good results from the management and sales shakeup that followed disappointing results last year after the acquisitions. We’ll keep an eye on that, but order growth at 29% was very healthy last quarter. Hilton is optimistic about the prospects going forward.

Fifth, management kind of surprised everyone by saying that they want to sell 10,000 houses in 2018. They sold 6,522 last year (up 11.3% vs. 2014) and expect to sell between 7,000 and 7,500 this year. Meritage will reach that goal both through having more communities (which means buying more land) and more sales per community (“absorption” is the term used). They target three sales per community per month. They achieved 2.54 per month in Q4, slightly below the 2.61 per month level for the full year.

Part of this unit growth will come from more entry-level homes being built – the goal is to go from about 25% today to about 40% in a few years. While these homes have a lower ASP, higher volume keeps that from hurting EPS, Hilton pointed out. There is some justification for that as Meritage would get some scale savings in buying more quantities of lumber and the other items that go into building a home.

An interesting result of that goal is that it would mean Meritage would be growing faster than the industry overall. Good if it can, as it means taking market share…

http://newsletters.fool.com/18/coverage/updates/2016/02/01/m…

JT

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