Meritage Homes Corporation (NYSE: MTH) reported Q4 EPS of $2.65, $0.72 better than the analyst estimate of $1.93. Revenue for the quarter came in at $1.14 billion versus the consensus estimate of $1.04 billion.

FOURTH QUARTER RESULTS

• Total orders for the fourth quarter of 2019 increased 27% year-over-year, driven by a 37% year-over-year increase in absorptions, largely due to strong demand for Meritage’s entry-level priced LiVE.NOW. homes. Higher absorptions offset an 8% year-over-year decline in average community count for the fourth quarter, resulting from early close-outs of communities in 2019. Absorptions were up 38% in the West region, 46% in the Central and 29% in the East region, demonstrating broad strength across Meritage’s markets. As a result of the Company's strategic product shift to lower-priced homes, fourth quarter average sales price (ASP) on orders and ending backlog were down 1% and 5%, respectively, compared to 2018.
• The 11% increase in home closing revenue for the quarter reflected a 13% increase in home closing volume, partially offset by a 2% reduction in ASP due to the Company’s strategic shift toward more affordable homes. Both West and East regions’ home closing revenues were up 19% year-over-year, while Central region home closing revenue was 8% lower in 2019 than 2018, primarily due to fewer active communities open in the fourth quarter of 2019.
• Home closing gross margin improved 80 bps to 19.8% from 19.0% a year ago, contributing to a 16% increase in total home closing gross profit over the prior year's fourth quarter. Fourth quarter 2019 gross margin was reduced by $3.1 million of inventory write-downs. Excluding real estate write-downs in both years ($0.9 million in 2018), home closing gross margins were 20.1% for the fourth quarter of 2019 and 19.1% for the fourth quarter of 2018.
• Earnings from financial services unconsolidated were $3.7 million lower in the fourth quarter of 2019 compared to 2018 due to a change in the structure of customer incentives offered by the Company's mortgage joint venture. The benefits from those incentives are now captured as part of home closing revenue rather than financial services earnings.
• Selling, general and administrative expenses (SG&A) totaled 10.1% of fourth quarter 2019 home closing revenue, a 50 bps reduction compared to 10.6% in the fourth quarter of 2018.
• Fourth quarter 2019 also included a $5.6 million loss on early extinguishment of debt related to the early redemption of $300 million notes due 2020.
• Fourth quarter 2019 pre-tax earnings margin increased 60 bps to 9.7% compared to 9.1% in 2018, reflecting increases in home closing gross margins and improved overhead leverage.
• Income taxes were reduced by approximately $20 million from energy tax credits on qualified homes closed in 2018 and 2019 pursuant to the retroactive renewal and extension of such tax credits through 2020, which was approved by Congress in December 2019.
• Net earnings increased 37% to $103.6 million ($2.65 per diluted share) for the fourth quarter of 2019, compared to $75.5 million ($1.91 per diluted share) for the fourth quarter of 2018, also benefiting from retroactive energy tax credits recorded in 2019.

MANAGEMENT COMMENTS“We delivered another quarter of strong results in the fourth quarter, capping off a solid performance for the full year 2019. The housing market remained strong through a traditionally quiet quarter, and with our strategic shift to entry-level fully implemented, Meritage was well positioned to capitalize on healthy demand, growing our sales volume, improving profitability and strengthening our balance sheet, while also positioning the company for long-term growth," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “Our fourth quarter results continued the momentum we had achieved over the prior three quarters, producing the strongest quarterly year-over-year growth in orders all year; the highest home closing gross margin, which was very close to our underwriting target; the most efficient overhead leverage; and nearly a 40% increase in diluted earnings per share.

“Our total orders for new homes increased 27% in the fourth quarter year-over-year, driven by a 37% increase in absorptions and benefiting from our strategic focus on delivering more affordable homes. Home closing revenue was up 11% and our home closing gross margin improved 80 bps due to the efficiencies we’re realizing from streamlining and simplifying our operations,” he continued. “Total SG&A expenses as a percentage of home closing revenue were 50 bps lower year-over-year and our net earnings increased 37% with the benefit of energy tax credits recognized retroactively for two years after their renewal and extension in December of 2019. We used positive cash flow from operations to retire $300 million of debt, reducing our net debt to capital ratio to 26.2%, while also securing more than 6,800 additional lots in the fourth quarter for future growth and ending the year with $319 million in cash.

“Our LiVE.NOW.® homes for value-conscious buyers and our innovative approach to interior personalization with our Studio M® Design Collections for first move-up buyers are delivering what home buyers want, while also providing efficiencies for Meritage that translate to improved profitability,” Mr. Hilton explained. “Absorptions in our LiVE.NOW. communities are significantly out-pacing traditional move-up communities, with equal or better margins.”

He concluded, “Based on our expectation that economic drivers remain positive for housing demand, and our ability to deliver homes that provide great value at lower price points for the broadest sectors of homebuyers, we feel we are well positioned to drive future growth and success. We secured more than 18,000 new lots in 2019, compared to approximately 10,000 in 2018, greatly expanding our pipeline for community count growth and positioning us to deliver strong volume growth as those communities are opened and begin selling over the next 4-6 quarters. We believe we can grow earnings faster than our top-line growth in 2020, leveraging the operating improvements we’ve made over the past few years while continuing to expand and refine them. For the full year 2020, we are projecting 9,700-10,200 total home closings and ASP’s between $360-370,000, with home closing gross margin in the mid-19’s percent and a tax rate of approximately 22%.”

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