Sunbelt Migration And Demographic Trends Will Fuel Demand

Key Takeaways

• Sunbelt expansion and a focus on affordable, move-in-ready homes target strong housing demand from younger buyers, supporting higher sales and sustained growth.
  
• Operational efficiency, disciplined land strategy, and prudent capital allocation underpin margin protection, scalability, and long-term shareholder value.
  
• Heavy dependence on vulnerable buyer segments and concentrated markets heightens risk from rising costs, regulatory pressures, and economic shifts, threatening margins and long-term growth.

Catalysts

Designs and builds single-family attached and detached homes in the United States.

• Meritage Homes is positioned to capture outsized revenue and earnings growth by expanding its community count in high-growth Sunbelt regions, which benefit from strong in-migration and population growth; this geographic focus aligns them with persistent housing shortages and structural demand drivers.
  
• The company’s unique strategy of focusing on affordable, entry-level, move-in-ready homes allows it to cater directly to Millennials and Gen Z buyers entering their prime home-buying years, supporting higher sales volumes, community absorption rates, and long-term revenue growth.
  
• Rapid backlog conversion achieved through 60-day closing commitments and increased spec inventory improves asset turns and enables Meritage to respond faster to market demand, driving top-line growth while containing SG&A as a percentage of revenue due to operational leverage.
  
• Ongoing investments in operational efficiency, streamlined building processes, and scale-driven purchasing power with national vendors are expected to protect and gradually expand gross and net margins, even in a challenging macro environment.
  
• Continued disciplined land acquisition and optioning, along with selective expansion into new high-demand geographies, positions Meritage for consistent delivery growth and revenue scalability, while prudent capital allocation (including buybacks and dividends) supports per-share earnings growth.

Meritage Homes Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Meritage Homes compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Meritage Homes's revenue will grow by 7.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 11.5% today to 9.6% in 3 years time.
• The bullish analysts expect earnings to reach $747.0 million (and earnings per share of $10.77) by about July 2028, up from $723.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.6x on those 2028 earnings, up from 7.5x today. This future PE is greater than the current PE for the US Consumer Durables industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 1.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

Meritage Homes Future Earnings Per Share Growth

Risks

• Rising interest rates and declining affordability have required Meritage to use rate buydowns and incentives to sustain sales, which has compressed average sales price and gross margins and may continue to pressure both revenue and net earnings if rates remain high or climb further.
  
• The company's focus on entry-level and first move-up homes makes it vulnerable to the ongoing long-term decline in housing affordability, as this buyer segment is most exposed to elevated mortgage rates and stagnant wage growth, risking future revenue and margin compression during downturns.
  
• Meritage maintains significant geographic concentration in the Sunbelt and select high-growth markets, making it susceptible to outsized risk from regional economic downturns or demographic shifts, which could sharply depress revenue and profits compared to more diversified builders.
  
• Persistent increases in land, lot, and construction costs, including potential future tariffs or supply chain disruptions, may further erode gross margins, especially as Meritage may be unable to fully pass these costs onto price-sensitive buyers, resulting in lower profitability.
  
• Stricter environmental regulations, the threat of climate-related events, and potential tightening of local zoning and land use policies could increase land and operational costs, delay construction, and restrict the company's growth pipeline, ultimately reducing long-term revenue potential and net margins.

Valuation

• The assumed bullish price target for Meritage Homes is $107.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Meritage Homes's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $107.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $7.8 billion, earnings will come to $747.0 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 8.5%.
• Given the current share price of $75.37, the bullish analyst price target of $107.0 is 29.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.