Meritage Homes has been treading water for the past six months, recording a small return of 3.8% while holding steady at $77.46. The stock also fell short of the S&P 500’s 11.4% gain during that period.
Is there a buying opportunity in Meritage Homes, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Meritage Homes Will Underperform?
We’re swiping left on Meritage Homes for now. Here are three reasons we avoid MTH, plus one 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 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 sluggish 3.7% compounded annual growth rate. This fell short of our benchmark for the industrials sector.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Meritage Homes, its EPS declined by 2.2% annually over the last five years while its revenue grew by 3.7%. 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).
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. With its shares trailing the market in recent months, the stock trades at 14.1× forward P/E (or $77.46 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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