Much of Meritage’s operations are in the Sunbelt, which was hit hard by the financial crisis; however, the company seems to be rebounding strongly. In the third quarter, revenue came in 54% higher than in the third quarter of 2011. As a result, Meritage Homes Corporation was profitable for that period and reported 19 cents per share in earnings (it had lost 10 cents per share a year earlier). In the first three quarters of the year, the company had EPS of 30 cents. If we annualize that year to date performance (which, obviously, comes out to 40 cents per share), then the stock is trading at a P/E of 92.
Meritage’s pricing is based on expectations of future growth: Wall Street analysts expect a very good fourth quarter, and the consensus for 2013 is $2.05 in earnings per share. That would imply a forward P/E of 24, so after that point Meritage Homes Corporation would have to continue growing. Yet if the housing market does have as much pent-up demand as some think, that could be achievable and that seems to be what Citadel is going for in an investment thesis. Jeffrey Vinik’s Vinik Asset Management had a smaller position at the end of June than Citadel- at about 180,000 shares- but all of those had been purchased in the second quarter of the year, representing another fund that was buying the stock. See more stock picks from Vinik Asset Management.
Larger U.S. homebuilders include Lennar Corporation (NYSE:LEN), D.R. Horton, Inc. (NYSE:DHI), PulteGroup, Inc. (NYSE:PHM), and Toll Brothers Inc (NYSE:TOL). Read our recent article on Lennar. These companies have market caps between $5 billion and $8 billion, so while they are not megacaps they are considerably larger than Meritage by that metric. On a forward basis, Meritage is about in the middle of this peer group: Lennar and DR Horton trade at 23-24 times forward earnings estimates, with PulteGroup’s P/E being a bit below that figure and Toll Brothers carrying a moderate premium. However, all of these companies are cheaper on a trailing earnings basis, and therefore less dependent on hitting the sell-side’s growth targets in 2013 in order to achieve these earnings estimates. In addition, in their most recent quarter each of these four companies at least came close to matching Meritage’s revenue growth rate compared to the same period in 2011; Lennar and Toll Brothers had an even stronger performance.
As a result, while the core Citadel thesis of a better housing market may be right our impression is that there are better homebuilding stocks to play that thesis. Meritage is highly dependent on future growth to justify its current valuation, and other companies in the industry should benefit about as much from a stronger market and thus also see good growth. Lennar, for example, combines a similar forward earnings multiple with better historical growth rates on the top line.
