Dr. Duru | Oct 12, 2015 01:26AM ET
When Meritage Homes (N:MTH) lowered guidance on September 9, 2015, the nation’s seventh largest homebuilder blamed several factors:
This news was quite a turn from the way MTH bullishly started the year with a pre-announcement of exceptionally strong sales. The stock gapped down 8.9% on the latest news and was down even further for a bit.
Meritage Homes (MTH) has started to recover from September’s selling
The chart above shows that MTH has started to recover from September’s earnings warning. The stock is now at a critical point as it trades just below the downtrending 50-day moving average (DMA) which has served as resistance since August. However, the stock may have bottomed right at the time of the Deutsche Bank (DE:DBKGn) 23rd Annual Leveraged Finance Conference on September 29 with a retest of the intraday low from the earnings warning. At the conference, MTH elaborated on its guidance and provided its outlook for the housing market. Importantly, MTH stuck by its bullish outlook and promised analysts that it will turn around the negative factors that drove the company to warn ahead of the conference.
Like all homebuilders, MTH believes that the housing market is still in the early stages of a recovery. The company juxtaposes very familiar housing data that is still barely off what would have been called recession levels in previous cycles versus the strong employment profile of the U.S. economy. I have increasingly heard that household formation is finally showing signs of life (I am still looking for the hard data!). MTH pointed to this development of “green shoots” over the past 3 to 4 quarters as support for its expectation of strong demand to come.
In particular, MTH has an “entry-level plus” strategy in preparation for what it sees as entry-level buyers with an older profile than typical entry-level buyers of the past. Delays in household formation mean that first-timers are older and looking for more home than 20-somethings are willing to accept. MTH called these bargain basement homes “doorbell and dishwasher optional.” Entry-level plus homes provide affordability through higher density building or lower priced lots in “emerging markets,” which I assume are growing suburbs outside of the country’s major job centers.
The development of late-stage entry-level buyers could be one of the most important demographic developments for the housing market in the coming 10 years or more. It is a development that could confound housing bears to no end. Housing bears have tended to look at the poor household formation and homeownership data and assume that these are trends driving inexorably toward something north of zero. (I have covered this topic in several earlier pieces). It is at least as valid to look at today’s poor numbers and project out a growing source of pent-up demand. At some point, today’s young people will strive for the same kind of independence young Americans have always sought. Companies like MTH are preparing for this swell. As MTH said, the company does not believe America is going to become a nation of renters.
Here are some other bullet points from the investor conference including the short Q&A session at the end. In particular, see the commentary on Arizona at the end of these notes:
Be careful out there!
Full disclosure: long call options on MTH
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