Over the last six months, Meritage Homes’s shares have sunk to $63.09, producing a disappointing 17.3% loss while the S&P 500 was flat. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Meritage Homes, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Meritage Homes Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Meritage Homes. Here are three reasons you should be careful with MTH and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Meritage Homes grew its sales at a tepid 5.4% compounded annual growth rate. This fell short of our benchmark for the industrials sector.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Meritage Homes’s EPS grew at a weak 3.3% compounded annual growth rate over the last five years, lower than its 5.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
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 significantly 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.
Final Judgment
Meritage Homes falls short of our quality standards. After the recent drawdown, the stock trades at 10.6× forward P/E (or $63.09 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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