4 Reasons Why Wedbush Is Bullish On Meritage Homes

Meritage Homes Corp MTH shares trade below the group average, offering an attractive entry point, according to Wedbush.

The Analyst

Wedbush analyst Jay McCanless initiated coverage of Meritage Homes with an Outperform rating and $55 price target.

The Thesis

Meritage Home's mix shift from higher price points to more entry-level and first-move-up product since 2016 is boosting demand growth, McCanless said in a Monday note.

The homebuilder plans to increase the community count to 40 percent in 2018 and a higher percentage in the out years, the analyst said. 

The rising community count could add upside risk to McCanless' estimates, he said. With the majority of a new community's lots sold within the first 12 months of opening, these openings should be a unit volume tailwind, the analyst said. 

Wedbush expects the company's earnings per share to rise by 49 percent in 2019 and by 14 percent in 2019. As the share of closings from newer communities increases, the firm forecast gross margins improving by 40 basis points. The decline in the tax provision from 42.1 percent in 2017 to 25 percent in 2018 could also boost the bottom line, according to Wedbush. 

As Meruitage sells out its older, higher-priced communities, McCanless said he expects its return metrics to improve and move closer to the group averages.

Meritage's next earnings report, due either in late April or early May, is an upcoming catalyst, the analyst said. 

The Price Action

Meritage Homes shares are up about 18 percent over the past year.

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