Meritage Homes: A Building Stock For All Seasons

Core Thesis - Meritage Homes (MTH) is positioned to gain market share and deliver homes efficiently while returning capital to shareholders, despite a challenging housing market outlook [1][2] Industry Overview - The U.S. housing market is currently undersupplied by 3.7 million units, contributing to decreased housing affordability [3] - The average sales price of new homes in the U.S. increased from approximately $332,000 in February 2020 to around $404,000 in March 2025 [5] Company Performance - Meritage Homes has increased its market share of U.S. new one-family homes from 1.3% in 2017 to 2.3% in the TTM [6] - The company recorded its second-highest first-quarter orders and closings in 1Q25, with 61% of homes closed sold within the same quarter, up from 48% the previous year [8][10] - Revenue and net operating profit after-tax (NOPAT) grew by 11% and 17% respectively from 2014 through TTM ending 1Q25, with NOPAT margin improving from 7% in 2014 to 11% in TTM [12] Financial Metrics - Meritage Homes generated $1.1 billion in free cash flow (FCF) from 2019 through 1Q25, representing 26% of enterprise value [18] - The company has returned $665 million to shareholders during the same period, including $179 million in dividends and $486 million in share repurchases [18][15] - The current dividend yield is 2.5%, with potential for a combined yield of 4.8% when factoring in share repurchases [14][16] Challenges - High mortgage rates have risen significantly, with the average 30-year fixed-rate mortgage at 6.8% in May 2025, making home purchases more expensive [19] - Meritage Homes' average selling price on home closings fell by 6% year-over-year in 1Q25, attributed to increased financial incentives [23] - The company's NOPAT margin decreased from 12% in 1Q24 to 8.6% in 1Q25 due to these pressures [23] Valuation Insights - At a current price of $67 per share, the market implies a permanent 30% decline in profits, despite historical growth rates of 21% compounded annually over the last five years [24] - If the company maintains historical growth rates, the stock could see a potential upside of over 40%, with a target price of $97 per share [26]