Meritage Homes (MTH)

Homebuilder Meritage Homes (NYSE:MTH) fell short of the market’s revenue expectations in Q3 CY2025, with sales falling 11.3% year on year to $1.42 billion. Next quarter’s revenue guidance of $1.5 billion underwhelmed, coming in 3.2% below analysts’ estimates. Its GAAP profit of $1.39 per share was 14.6% below 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).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Meritage Homes grew its sales at a mediocre 7.4% compounded annual growth rate. This fell short of our benchmark for the industrials sector and is a poor baseline for our analysis.

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 performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 3.5% annually.

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 $670 million in the latest quarter and averaged 34.4% 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 missed Wall Street’s estimates and reported a rather uninspiring 11.3% year-on-year revenue decline, generating $1.42 billion of revenue. Company management is currently guiding for a 7.5% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 1.7% over the next 12 months. Although this projection indicates its newer products and services will catalyze better top-line performance, it is still below the sector average.

At StockStory, we prefer high gross margin businesses because they indicate the company has pricing power or differentiated products, giving it a chance to generate higher operating profits.

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 25.6% gross margin over the last five years. That means Meritage Homes paid its suppliers a lot of money ($74.42 for every $100 in revenue) to run its business.

This quarter, Meritage Homes’s gross profit margin was 18.9%, marking a 6 percentage point decrease from 24.8% in the same quarter last year. Meritage Homes’s full-year margin has also been trending down over the past 12 months, decreasing by 4 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 16.4%. 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.

Analyzing the trend in its profitability, Meritage Homes’s operating margin decreased by 4.5 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 decent 9.1% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

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 16.8% mark a reversal from its five-year trend. We hope Meritage Homes can return to earnings growth in the future.

In Q3, Meritage Homes reported EPS of $1.39, down from $2.67 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Meritage Homes’s full-year EPS of $7.48 to shrink by 1.2%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Meritage Homes broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders. 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 1.9 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 in the middle of an investment cycle.

Meritage Homes burned through $104.3 million of cash in Q3, equivalent to a negative 7.4% margin. The company’s cash burn was similar to its $99.96 million of lost cash in the same quarter last year.

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%, 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. Unfortunately, Meritage Homes’s ROIC has decreased 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 $728.9 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 $723.6 million of EBITDA over the last 12 months, we view Meritage Homes’s 4.0× 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 struggled to find many positives in these results as its revenue and EPS fell short of Wall Street’s estimates. Its quarterly guidance for both metrics also missed. Overall, this was a weaker quarter. The stock traded down 7.2% to $65.90 immediately after reporting.

Updated: December 4, 2025 at 10:43 PM EST

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.

We see the value of companies helping their customers, but in the case of Meritage Homes, we’re out. To begin with, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its impressive operating margins show it has a highly efficient business model, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its projected EPS for the next year is lacking.

Meritage Homes’s P/E ratio based on the next 12 months is 10.9x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $83.13 on the company (compared to the current share price of $72.51).