Meritage Homes (MTH)

Homebuilder Meritage Homes (NYSE:MTH) reported Q2 CY2025 results beating Wall Street’s revenue expectations, but sales fell by 4.6% year on year to $1.62 billion. Its GAAP profit of $2.04 per share was 3.8% above analysts’ consensus estimates.

Company Overview

Originally founded in 1985 in Arizona as Monterey Homes, Meritage Homes (NYSE:MTH) is a homebuilder specializing in designing and constructing energy-efficient and single-family homes in the US.

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Other homebuilders operating in Mertiage's markets include Lennar (NYSE:LEN), PulteGroup (NYSE:PHM), and DR Horton (NYSE:NVR).

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Meritage Homes grew its sales at a solid 9% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Meritage Homes’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.8% over the last two years.

We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Meritage Homes’s backlog reached $695.5 million in the latest quarter and averaged 36.5% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, Meritage Homes’s revenue fell by 4.6% year on year to $1.62 billion but beat Wall Street’s estimates by 2.4%.

Looking ahead, sell-side analysts expect revenue to grow 8.3% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and indicates its newer products and services will fuel better top-line performance.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Meritage Homes has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 25.7% gross margin over the last five years. That means Meritage Homes paid its suppliers a lot of money ($74.26 for every $100 in revenue) to run its business.

Meritage Homes’s gross profit margin came in at 21% this quarter, down 5.1 percentage points year on year. Meritage Homes’s full-year margin has also been trending down over the past 12 months, decreasing by 3.1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Meritage Homes has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16.6%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Meritage Homes’s operating margin decreased by 1.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Meritage Homes’s EPS grew at a spectacular 15.2% compounded annual growth rate over the last five years, higher than its 9% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t improve.

Diving into the nuances of Meritage Homes’s earnings can give us a better understanding of its performance. A five-year view shows that Meritage Homes has repurchased its stock, shrinking its share count by 5.8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Meritage Homes, its two-year annual EPS declines of 12.2% mark a reversal from its (seemingly) healthy five-year trend. We hope Meritage Homes can return to earnings growth in the future.

In Q2, Meritage Homes reported EPS at $2.04, down from $3.15 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 3.8%. Over the next 12 months, Wall Street expects Meritage Homes’s full-year EPS of $8.76 to shrink by 1.9%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Meritage Homes has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.7%, lousy for an industrials business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Meritage Homes to make large cash investments in working capital and capital expenditures.

Taking a step back, we can see that Meritage Homes’s margin dropped by 6.6 percentage points during that time. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Meritage Homes broke even from a free cash flow perspective in Q2. This result was good as its margin was 7.8 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Meritage Homes hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 20.2%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Meritage Homes’s ROIC decreased by 5 percentage points annually over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Meritage Homes reported $930.5 million of cash and $3.63 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $847.5 million of EBITDA over the last 12 months, we view Meritage Homes’s 3.2× net-debt-to-EBITDA ratio as safe. We also see its $7.16 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Meritage Homes beat analysts’ revenue expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its backlog missed. Overall, this was a mixed quarter. The stock remained flat at $75.38 immediately following the results.

Updated: July 27, 2025 at 11:44 PM EDT

Are you wondering whether to buy Meritage Homes or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Meritage Homes falls short of our quality standards. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its projected EPS for the next year is lacking.

Meritage Homes’s P/E ratio based on the next 12 months is 8x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $87.50 on the company (compared to the current share price of $69.50).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.