Sun Belt Demand Will Spur Homebuilding Growth Despite Margin Risks

Key Takeaways

• Expansion in community count and focus on entry-level homes positions the company to capture demand from younger buyers and support stable long-term growth.
  
• Geographic diversification, efficiency gains, and disciplined capital allocation underpin improved margins, risk mitigation, and enhanced earnings potential.
  
• Persistent affordability challenges, overexposure to vulnerable buyer segments, operational visibility issues, elevated land costs, and increased competition all threaten margins, revenue stability, and long-term growth prospects.

Catalysts

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

• Meritage's significant and accelerating growth in community count-including double-digit expansion for both 2025 and 2026-directly addresses the persistent undersupply of housing in the U.S., positioning the company to capture increased new-home demand and drive future revenue and earnings growth as macro headwinds abate.
  
• The company's strategic focus on entry-level, move-in-ready homes aligns with favorable demographic shifts driven by Millennials and Gen Z entering homebuying age, expanding Meritage's addressable market and providing a foundation for long-term stable order growth and volume, which supports higher revenue and EPS stability.
  
• Continued improvements in construction cycle times (down to ~110 days per home) and operational efficiencies-driven by process standardization and leveraging technological advancements-reduce build costs and working capital needs, structurally enhancing gross margins and boosting future net income.
  
• Ongoing geographic expansion and deeper penetration into high-growth Sun Belt markets diversify Meritage's revenue streams, mitigate regional risks, and enable the company to capture market share in areas experiencing strong migration, fueling sustainable top-line growth.
  
• Disciplined capital allocation, including substantial and opportunistic share buybacks enabled by a strong balance sheet and reduced land spend, signals confidence in undervaluation and is likely to drive higher EPS through lower share count, especially as industry consolidation trends favor larger, efficient builders like Meritage.

Meritage Homes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Meritage Homes's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.3% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $549.0 million (and earnings per share of $8.55) by about August 2028, down from $638.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $688.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the US Consumer Durables industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 1.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.04%, as per the Simply Wall St company report.

Meritage Homes Future Earnings Per Share Growth

Risks

• Persistent use of high financing incentives and price reductions to offset affordability challenges has driven down average selling prices, compressed gross margins by 480 bps year-over-year, and resulted in a 35% decline in net earnings, indicating sustained margin risk if affordability issues and buyer hesitation persist or worsen.
  
• The company's heavy strategic focus and growth in the entry-level and first move-up segments leaves Meritage overexposed to affordability-driven demand shocks; ongoing wage stagnation, high mortgage rates, or weakening consumer sentiment could reduce volumes and revenue in this key segment.
  
• There is a notable lack of visibility and lower backlog into future quarters due to high backlog conversion strategy and short sales-to-close timelines, meaning Meritage enters new quarters with few pre-sold homes, raising the risk of volatility in revenue and earnings if market demand suddenly weakens.
  
• Higher-than-normal land costs from prior years, limited land price deflation, and ongoing risk of regulatory/zoning headwinds keep land acquisition and development spend elevated, which, coupled with recent land deal terminations, may constrain long-term gross margin improvement and increase the risk of future supply disruptions impacting financial performance.
  
• Increased for-sale housing inventory, the return of competition from the resale market, and consistent or rising industry-wide incentives may limit Meritage's ability to maintain pricing power, placing further pressure on ASP and net margins and increasing revenue risk, especially if alternative housing models or sustained high interest rates dampen traditional demand.

Valuation

• The analysts have a consensus price target of $86.125 for Meritage Homes based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.1 billion, earnings will come to $549.0 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 9.0%.
• Given the current share price of $77.25, the analyst price target of $86.12 is 10.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.