Core Viewpoint - Meritage Homes Corporation (MTH) has experienced a stock rally of 8.8% over the past month, outperforming both the Zacks Building Products - Home Builders industry and the S&P 500 Index, indicating strong market performance and investor interest [1][2]. Group 1: Company Performance - The company benefits from resilient housing demand and its strategy of delivering quick-turn, affordable move-in-ready homes, which aligns with current market trends [2][4]. - MTH stock is trading above its 50-day and 200-day moving averages, indicating positive technical momentum [3]. - The company achieved an average of 4.5 net sales per month in Q2 2024, exceeding its target of 4 net sales per month, showcasing strong sales performance [8]. Group 2: Strategic Advantages - Meritage Homes employs a dynamic strategy focused on nearly complete homes before sale, akin to a just-in-time inventory model, which effectively meets consumer demand for immediate occupancy [4][7]. - The 60-day closing guarantee is a key highlight of this strategy, appealing to buyers in a fast-paced market [5]. - By targeting entry-level and first-move-up homebuyers, the company positions itself to cater to the largest segment of homebuyer demand, enhancing its market appeal [6]. Group 3: Market Context - The U.S. housing market shows signs of strength, with new single-family home sales reaching a seasonally adjusted annual rate of 739,000 units in July 2024, marking a 10.6% increase [10]. - Existing home sales also exceeded expectations in July, reversing a four-month decline, indicating a potential market rebound [11]. Group 4: Valuation and Estimates - MTH stock has a forward 12-month price-to-earnings ratio of 9.13X, below the industry average of 11.53X, suggesting an attractive valuation for investors [12]. - Analysts have revised earnings estimates upward for MTH, with current and next year estimates at $21.09 and $21.98, reflecting year-over-year growth rates of 5.8% and 4.2% respectively [14].

Core Insights - Meritage Homes published its 2023 ESG Report, highlighting its commitment to sustainability and social initiatives as a key aspect of its operations [1][3]. Environmental Initiatives - Delivered 13,308 ENERGY STAR® certified homes [4] - Reported an average HERS Index energy efficiency score of 52 [4] - Recognized as an eleven-time recipient of the U.S. Environmental Protection Agency's ENERGY STAR® Partner of the Year [4] Social Initiatives - Achieved Great Place to Work® Certified status for the first time [4] - Launched inaugural employee resource groups [4] - Received the Avid Cup – Production award for the third consecutive year, recognizing high customer satisfaction [4] - Earned the Hearthstone BUILDER Humanitarian Award for philanthropic efforts [4] Company Overview - Meritage Homes is the fifth-largest public homebuilder in the U.S., focusing on energy-efficient and affordable homes [6] - The company has delivered over 185,000 homes in its 38-year history and is recognized for quality construction and customer experience [7]

Core Viewpoint - Meritage Homes reported strong second-quarter 2024 results, with earnings and revenues exceeding expectations and showing year-over-year growth [2][4]. Financial Performance - Earnings per share (EPS) reached $6.31, surpassing the Zacks Consensus Estimate by 22.1% and increasing 26% from $5.02 in the previous year [5]. - Total revenues amounted to $1.7 billion, reflecting an 8.3% increase from $1.57 billion in the same quarter last year [5]. - Homebuilding revenues were $1.69 billion, up 7.6% year-over-year, exceeding the consensus estimate by 7.5% [6]. Operational Highlights - The company closed 4,118 homes, an 18% increase from 3,490 units in the prior year [7]. - Total home orders rose 14% year-over-year to 3,799 homes, with a dollar value increase of 7% to $1.57 billion [8]. - The backlog at quarter-end totaled 2,714 units, down 28% year-over-year, with a backlog value decrease of 34% to $1.11 billion [9]. Strategic Initiatives - Meritage invested $631 million in land acquisition and development, controlling over 71,000 lots compared to about 60,000 a year ago [3][11]. - The company achieved a backlog conversion rate of 136% and a return on equity of 18.3% during the quarter [4]. Outlook and Guidance - The company raised its 2024 outlook, now expecting 14,750-15,500 home closings and revenues between $6.1 billion and $6.3 billion [14]. - For Q3, Meritage anticipates 3,650-3,850 home closings, generating revenues of $1.5 billion to $1.6 billion, with EPS expected between $4.60 and $5.05 [16]. Industry Context - Meritage Homes is part of the Zacks Building Products - Home Builders industry, which has seen competitors like D.R. Horton report a revenue increase of 2.5% year-over-year [21].

Group 1 - Meritage Homes (MTH) is identified as a stock with a buy rank and strong income characteristics for investors [1] - The Zacks Consensus Estimate for Meritage Homes' current year earnings has increased by 5.1% over the last 60 days [1] - Meritage Homes has a Zacks Rank of 1 (Strong Buy) and offers a dividend yield of 1.7%, which is significantly higher than the industry average of 0.0% [1]

Company Initiatives - Meritage Homes launched the Meritage Cares Assistance Fund to provide tax-advantaged financial assistance to eligible employees facing financial hardships due to military deployment, serious illness, injury, or natural disasters [1] - The company established three employee resource groups in late 2023 to promote belonging and community among employees [1] Company Performance and Recognition - Meritage Homes is the fifth-largest public homebuilder in the U.S. based on homes closed in 2023, offering energy-efficient and affordable homes across multiple states [2] - The company received the Great Place to Work® Certification™ for the second consecutive year, with 94% of employees affirming it as a great workplace, compared to 57% at a typical U.S. company [4][5] - Meritage has delivered over 185,000 homes in its 38-year history and is recognized for its quality construction and customer experience, receiving multiple awards from the U.S. Environmental Protection Agency [5]

Company Initiatives - Meritage Homes launched the Meritage Cares Assistance Fund, providing tax-advantaged financial assistance to eligible employees facing financial hardships due to military deployment, serious illness, injury, or natural disasters [1] - The company established three employee resource groups in late 2023 to promote belonging and community among employees [1] Company Overview - Meritage Homes is the fifth-largest public homebuilder in the U.S. based on homes closed in 2023, offering energy-efficient and affordable entry-level and first move-up homes across multiple states including Arizona, California, and Texas [2] - The company has delivered over 185,000 homes in its 38-year history and is recognized for its quality construction and customer experience [5] Workplace Culture - Meritage Homes received the Great Place to Work® Certification™ for the second consecutive year, with 94% of participating employees affirming it as a great workplace, compared to 57% at a typical U.S.-based company [4][5] - The certification is based on the 2024 Great Place To Work Trust Index® Survey, which included over 1.3 million workers worldwide [4]

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201%2E%20Financial%20Statements) Unaudited consolidated financial statements present asset growth, increased net earnings, and details on financing and segment performance Unaudited Consolidated Financial Statements Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | **Total Assets** | **$6,923,980** | **$6,353,134** | | Real estate | $5,175,084 | $4,721,291 | | Cash and cash equivalents | $992,921 | $921,227 | | **Total Liabilities** | **$2,041,446** | **$1,741,234** | | Senior and convertible senior notes, net | $1,303,600 | $994,689 | | **Total Stockholders' Equity** | **$4,882,534** | **$4,611,900** | Consolidated Income Statement Highlights (in thousands, except per share) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | **Total closing revenue** | **$1,693,738** | **$1,567,400** | **$3,162,139** | **$2,846,708** | | **Net earnings** | **$231,555** | **$186,836** | **$417,571** | **$318,137** | | **Diluted EPS** | **$6.31** | **$5.02** | **$11.37** | **$8.56** | Consolidated Cash Flow Highlights (in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(36,017) | $355,885 | | Net cash used in investing activities | $(19,639) | $(22,140) | | Net cash provided by/(used in) financing activities | $127,350 | $(32,063) | | **Net increase in cash** | **$71,694** | **$301,682** | Notes to Unaudited Consolidated Financial Statements - The company operates in **three homebuilding regions** (West, Central, East) and a financial services segment, focusing on entry-level and first move-up single-family homes[10](index=10&type=chunk)[130](index=130&type=chunk) - In May 2024, the company issued **$575.0 million of 1.750% Convertible Senior Notes due 2028** and used a portion of the proceeds to redeem all **$250.0 million of its 6.00% Senior Notes due 2025**[28](index=28&type=chunk)[117](index=117&type=chunk) - Concurrent with the convertible note offering, the company spent **$61.8 million** on capped call transactions to reduce potential dilution from the conversion of the notes[29](index=29&type=chunk)[56](index=56&type=chunk) - Quarterly cash dividends paid on common stock increased to **$0.75 per share** in Q2 2024, up from **$0.27 per share** in Q2 2023, with total dividends paid in the first six months of 2024 at **$1.50 per share**[76](index=76&type=chunk) Total Assets by Segment (in thousands) | Segment | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | West | $1,861,740 | $1,861,803 | | Central | $1,614,511 | $1,543,666 | | East | $2,317,470 | $1,920,099 | | Financial Services | $2,074 | $1,889 | | Corporate and Unallocated | $1,128,185 | $1,025,677 | | **Total** | **$6,923,980** | **$6,353,134** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202%2E%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses strong Q2 2024 home demand, record revenue, improved gross margins, and robust liquidity, emphasizing spec-building Overview and Outlook - Demand for entry-level homes remains **strong**, driven by life events for Millennials, Baby Boomers, and Gen Z, coupled with a persistent shortage of existing housing supply[203](index=203&type=chunk) - The company's **spec building strategy** is a key competitive advantage, providing quick move-in inventory that appeals to customers and competes with the limited resale market[203](index=203&type=chunk) - The company is focused on strategic initiatives including improving the home buying experience, achieving top 5 market positions, managing construction efficiencies, and balancing shareholder returns with growth[216](index=216&type=chunk)[217](index=217&type=chunk)[238](index=238&type=chunk) Results of Operations Q2 2024 vs. Q2 2023 Performance | Metric | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Home Closing Revenue (Millions) | $1,693.7 | $1,543.0 | +9.8% | | Homes Closed (Units) | 4,118 | 3,490 | +18.0% | | Avg. Sales Price (Thousands) | $411.3 | $442.1 | -7.0% | | Home Orders (Units) | 3,799 | 3,340 | +13.7% | | Cancellation Rate (%) | 10 | 12 | -2 p.p. | - Home closing gross margin improved by **150 basis points to 25.9%** in Q2 2024, up from **24.4%** in Q2 2023, driven by lower direct costs, leverage from higher revenue, and shorter construction cycle times[179](index=179&type=chunk)[214](index=214&type=chunk) - The order backlog decreased to **2,714 homes ($1.1 billion)** from **3,772 homes ($1.7 billion)** year-over-year, due to a significantly higher backlog conversion rate (**135.8%** in Q2 2024 vs. **89.0%** in Q2 2023) as more spec homes are sold later in the construction cycle[193](index=193&type=chunk)[236](index=236&type=chunk) - Financial services profit was **$4.8 million** in Q2 2024, a significant improvement from a loss of **$2.6 million** in Q2 2023, with the prior year period including **$7.9 million** in charges for unused interest rate forward commitments compared to only **$2.0 million** of similar charges in Q2 2024[166](index=166&type=chunk) Liquidity and Capital Resources - The company maintains a strong liquidity position with **$992.9 million in cash and cash equivalents** and **$795.3 million** available under its Credit Facility as of June 30, 2024[89](index=89&type=chunk)[115](index=115&type=chunk) Capitalization Ratios | Ratio | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Debt-to-capital | 21.2% | 17.9% | | Net debt-to-capital | 6.2% | 1.9% | - Net cash used in operating activities was **$36.0 million** for the first six months of 2024, compared to **$355.9 million** provided by operations in the same period of 2023, primarily due to a **$450.6 million increase** in real estate investment[101](index=101&type=chunk)[266](index=266&type=chunk) - Financing activities in the first half of 2024 included proceeds from issuing **$575.0 million** in convertible notes, offset by the redemption of **$250.0 million** in senior notes, **$61.8 million** for capped calls, **$55.9 million** in share repurchases, and **$54.5 million** in dividend payments[247](index=247&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%203%2E%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate exposure, largely mitigated by fixed-rate debt and no outstanding variable-rate borrowings - The company's primary market risk is interest rate risk, however, its **$1.3 billion** in aggregate principal of senior and convertible senior notes have fixed interest rates, which minimizes financial statement risk from rate changes[274](index=274&type=chunk) - The company's revolving credit facility is subject to variable interest rates based on SOFR or Prime, but there were **no outstanding borrowings** under the facility as of June 30, 2024[115](index=115&type=chunk)[274](index=274&type=chunk) [Item 4. Controls and Procedures](index=36&type=section&id=Item%204%2E%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal controls - Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were **effective** as of June 30, 2024[275](index=275&type=chunk) - No changes in the company's internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[222](index=222&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=38&type=section&id=Item%201%2E%20Legal%20Proceedings) The company is involved in routine legal proceedings, primarily construction defect claims, with management expecting no material adverse financial impact - The company is involved in various routine legal proceedings incidental to its business, such as construction defect claims, with most exposure expected to be covered by subcontractor warranties, indemnities, and insurance[201](index=201&type=chunk) - Management believes that as of June 30, 2024, there are **no pending legal or warranty matters** that would have a material adverse impact, and that reserves are sufficient[201](index=201&type=chunk)[229](index=229&type=chunk) [Item 1A. Risk Factors](index=38&type=section&id=Item%201A%2E%20Risk%20Factors) This section highlights material risks, including the capital-intensive homebuilding industry, significant indebtedness, and counterparty risk from capped call transactions - The company's indebtedness of approximately **$1.3 billion** is a key risk, as it could require a substantial portion of cash flow for debt service, reducing funds available for operations and growth[278](index=278&type=chunk) - A new risk is the counterparty credit risk associated with the capped call transactions, where a default by one of the financial institution counterparties could expose the company to greater stock dilution upon conversion of its convertible notes[264](index=264&type=chunk)[279](index=279&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202%2E%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports the private placement of $575.0 million in convertible senior notes and updates on its stock repurchase program, with no Q2 repurchases - In May 2024, the company issued **$575.0 million of 1.75% Convertible Senior Notes due 2028** in a private placement to qualified institutional buyers, relying on an exemption from registration under the Securities Act[257](index=257&type=chunk) - As of June 30, 2024, **$129.1 million** remained available under the company's stock repurchase program, with **no shares repurchased** during the three months ended June 30, 2024[258](index=258&type=chunk) [Item 5. Other Information](index=40&type=section&id=Item%205%2E%20Other%20Information) No director or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter - During the quarter ended June 30, 2024, **no director or officer adopted or terminated** a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement[291](index=291&type=chunk) [Item 6. Exhibits](index=41&type=section&id=Item%206%2E%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including debt agreements, capped call confirmations, and officer certifications - The report includes a list of filed exhibits, such as corporate governance documents, debt agreements (including the Indenture for the 2028 Convertible Notes), and officer certifications required under Sarbanes-Oxley[265](index=265&type=chunk)[284](index=284&type=chunk)

Financial Data and Key Metrics Changes - In Q2 2024, home closing revenue reached $1.7 billion, reflecting an 18% increase in home closing volume year-over-year, despite a 7% decrease in average selling price (ASP) due to product and geographic mix [101] - Home closing gross margin improved by 150 basis points to 25.9% compared to 24.4% in the prior year, driven by lower direct costs and greater leverage of fixed expenses on higher revenue [95][97] - Diluted EPS increased by 26% year-over-year to $6.31 from $5.02 in 2023, with net earnings rising 31% to $418 million [97][98] Business Line Data and Key Metrics Changes - The company achieved a backlog conversion rate of 136%, resulting in 4,118 home deliveries [83] - Sales orders for Q2 2024 totaled 3,799 homes, up 14% year-over-year, with entry-level homes comprising 92% of total orders volume [88] - The cancellation rate remained at 10%, below the historical average in the mid-teens, indicating strong demand for move-in ready homes [88][34] Market Data and Key Metrics Changes - The Central region, particularly Texas markets, had the highest average absorption pace of 4.7 net sales per month, while the West region saw significant year-over-year growth in absorption pace to 4.4 net sales per month [90][91] - The East region exhibited the largest year-over-year increase in sales orders, becoming the largest region based on sales order volume [92] - The company ended Q2 2024 with approximately 6,500 spec homes in inventory, a 46% increase from the previous year [93] Company Strategy and Development Direction - The company is focusing on a 60-day closing guarantee and move-in ready homes to target a larger segment of homebuyer demand [86] - The strategy aims to compete effectively against resale inventory and is expected to yield efficiencies in operations [86] - The company plans to grow market share in existing markets while exploring new markets, with a goal of reaching 20,000 units in the next three to four years [30][104] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand environment remaining constructive due to favorable demographics and a fundamental underbuilt supply of homes [89] - The company anticipates a slower sales pace in the second half of the year due to seasonality but expects to maintain strong performance overall [89][101] - Management noted that the cancellation rate could decrease further as the strategy of selling 60-day move-in homes is fully implemented [34] Other Important Information - The company received an investment grade upgrade from Moody's, reflecting efforts to strengthen its balance sheet [94] - The company plans to spend $2 billion to $2.5 billion annually on land acquisition and development, with a significant increase in land spend observed in Q2 2024 [108][109] - The quarterly cash dividend was nearly tripled year-over-year to $0.75 per share, totaling $27.2 million in Q2 2024 [109] Q&A Session Summary Question: What is driving the decrease in implied second half EPS? - Management clarified that the decrease is due to the timing of closings being pulled into earlier quarters, not a change in sales volume expectations [15][17] Question: What are the expectations for operating cash flow in 2024? - Management indicated that they are comfortable maintaining a large cash balance and will continue to redeploy cash into the business, dividends, and share repurchases [26][28] Question: How is the company approaching the build-to-rent market? - Management noted a shift in engagement with build-to-rent operators towards community-level projects, indicating a growing interest in this market [10] Question: What is the outlook for incentives if the Fed cuts rates? - Management believes lower rates will positively impact the business, potentially reducing the need for incentives while maintaining margins [40][43] Question: What is the timeline for reaching the target of 20,000 units? - Management expects to achieve a growth rate of 10% year-over-year, aiming for a three to four-year timeline to reach the target [44]

Financial Performance - Home closings increased by 18% from 3,490 in 2Q23 to 4,118 in 2Q24[22] - Home closing revenue increased by 10% from $1543 million in 2Q23 to $1694 million in 2Q24[22] - Home closing gross profit increased by 17% from $377 million in 2Q23 to $440 million in 2Q24[22] - Diluted EPS increased by 26% from $502 in 2Q23 to $631 in 2Q24[22] Sales and Orders - Net sales orders increased 14% year-over-year[15] - Total orders were 3,799 in 2Q24[7,16] - Average sales price (ASP) on orders decreased by 6% year-over-year to $414K[16] Land and Development - Total lots controlled were 70,822 in 2Q24[33] - Supply of lots is 47 years[33] - Land spend was $631 million in 2Q24[33] Balance Sheet and Capital Structure - The company issued $575 million in new 175% convertible debt due in 2028[25] - The company refinanced its revolving credit facility to increase the size to $910 million[28,30] - Net debt-to-capital ratio is 62%[31] Guidance - The company expects home closings of 14,750-15,500 units for full year 2024[26] - The company expects home closing revenue of $61-63 billion for full year 2024[26]

Core Insights - Meritage Homes reported revenue of $1.69 billion for the quarter ended June 2024, reflecting an 8.1% increase year-over-year and surpassing the Zacks Consensus Estimate of $1.58 billion by 7.53% [1][3] - The company's EPS for the quarter was $6.31, up from $5.02 in the same quarter last year, exceeding the consensus estimate of $5.17 by 22.05% [1][3] Financial Performance Metrics - Homes ordered totaled 3,799, slightly below the average estimate of 3,925 from 10 analysts [3] - Average sales price for home closing revenue was $411, compared to the estimated $415.03 [3] - Homes closed reached 4,118, exceeding the average estimate of 3,778 [3] - Order backlog stood at 2,714, below the average estimate of 3,186 [3] - Order backlog value was $1.11 billion, compared to the estimated $1.29 billion [3] - Active communities totaled 287, slightly above the estimate of 278 [3] - Average sales price for home orders was $414, compared to the estimated $412.13 [3] - Homes ordered value was $1.57 billion, below the average estimate of $1.61 billion [3] - In the West Region, homes ordered were 1,114, below the average estimate of 1,193 [3] - Total closing revenue from homebuilding was $1.69 billion, reflecting a 9.8% increase year-over-year [3] - Financial services revenue was reported at $8.31 million, exceeding the average estimate of $6.59 million by 33.8% year-over-year [3] Stock Performance - Meritage shares have returned +20.8% over the past month, outperforming the Zacks S&P 500 composite's +1.8% change [4] - The stock currently holds a Zacks Rank 3 (Hold), indicating potential performance in line with the broader market in the near term [4]