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Author: Juliebb Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8  
Subject: MTH Looks great! Date: 8/25/1999 11:48 AM
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Hello, anyone out there? I bought this stock yesterday. The Sept 6 issue of Fortune which ranks it #2 in their list of growing companies called it to my attention. After running through the numbers, I have a hard time finding a downside. Here's a sum-up:
Current year PE=4.5
Year-forward PE=4
5-year annual rate of growth estimate 14%
YPEG=0.29
Share price<Book value!!! (I have not been able to find another share for which this is true).
Sales are 4 x share price.
11 straight years of profits
2 consecutive quarters of beating EPS estimates (+15%, +25%)
Record backlog of orders for new homes
Financials that meet or beat those of other companies in the same industry.
When I compared with LAF, a major industry construction player, ROE and ROA were better for MTH; profitability was comparable (7.7 vs 9.9).
Most shares are owned by insiders (49%) so those running the business have a strong interest in making it work. Insider trading index is positive (they're buying their own stock) indicating confidence in the future.
Conclusion: The risks of investing in this stock – other than those inherent to the business (government regulation of taxes and zoning; climate, general state of the economy, etc…) seem minimal. I don't expect it to fly up and down like a Net stock but it sounds like a safe haven that will bring consistent and solid returns in the years ahead. I expect it to be a low-key yet serious performer that will add a sprinkle of balance to my tech-heavy portfolio. I'm in! -Julie
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Author: rogerquick Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5 of 8
Subject: Re: MTH Looks great! Date: 8/26/1999 12:50 AM
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I just took a look at this stock (also prompted by its high rating in Fortune). I'm looking for one more stock to put in my protfolio and am strongly considering this one.

The only concern I have is the high level of debt on the balance sheet. It appears Meritage is snapping up property at a far quicker pace than it is generating cash. The problem with this is that interest rates are trending upward. This not only effects MTH's P&L with higher interest charges, but it also drives down demand for MTH's houses. MTH's profitability has been down significantly for the past two quarters when compared with the same quarters in the prior year. That doesn't seem to be a result from weak demand, however, as sales were up significantly. Hopefully the profitability decrease is only temporary.

It's hard to argue against a stock, though, with such an outrageously low P/E coupled with high growth. Good luck with the stock. I might just have to join you.

Roger

P.S. I bought KELL a couple of weeks ago. KELL has shown growth similar to MTH and also has a low P/E. KELL's problem is also debt, though this may partially be solved through a new off-balance-sheet financing arrangement. KELL's market cap is also well below its book value. With today's nutty valuations, though, who knows what's worth what anymore? KELL's website will give you a pretty decent overview of the company. MTH has a slick website, too, if you haven't already wandered over.

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Author: Juliebb Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6 of 8
Subject: Re: MTH Looks great! Date: 8/26/1999 6:03 AM
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The only concern I have is the high level of debt on the balance sheet. It appears Meritage is snapping up property at a far quicker pace than it is generating cash. The problem with this is that interest rates are trending upward. This not only effects
MTH's P&L with higher interest charges, but it also drives down demand for MTH's houses. MTH's profitability has been
down significantly for the past two quarters when compared with the same quarters in the prior year. That doesn't seem to be
a result from weak demand, however, as sales were up significantly. Hopefully the profitability decrease is only temporary.

Roger:

I don't think snapping up property is a problem with the current backlog of orders. Debt is certainly a legitimate concern and taking on debt up-front is a risk inherent to the capital goods industry (as are low profit ratios). MTH still looks pretty efficient at it though. It's LT debt to equity ratio is only 0.55 vs 0.85 for the industry and 1.1 for the S&P 500. MTH's total debt ratio to equity is 0.86 vs the industry 1.10 and S&P 0.96. Sounds like debt is under control.

I don't really buy the argument that rising interest rates cramp real estate demand (Remember the huge real estate boom of the late eighties? Those double digit rates didn't seem to rain on the parade much). IMO, what fuels the real estate market is a strong economy. I take the "American" dream (by the way, I live in Paris), of single home ownership as a given. In other words, demand is constant. What changes is whether or not people have money or access to the cash that makes this latent demand a reality. The US economy looks pretty sound to me and I view the current rates situation as healthy, anti-inflationist tweaking, not as a threat to home sales. I would even go so far as to argue that there is no indication that interest rates will decline in the near future and that if someone is set on buying a house, then they are likely to speed up their decision fearing that yet another increase in rates lies ahead. (If you've ever invested in a stock as it was going up because of fear of missing out on a great thing, then you know what kind of psychology I'm talking about). Hence, slowly rising interest rates might even accelerate demand for housing.

My major concern with this stock is the cyclical nature of the economy in general so I'll keep my eyes on the fundamentals. When the fed starts lowering interest rates to boost consumer spending (ie recession looming), I will worry, not before.

My advice: join the MTH house party! Over and out. -j


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Author: Montymoto Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7 of 8
Subject: Re: MTH Looks great! Date: 8/28/1999 7:56 PM
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This stock looks very good. But.

You have to ask yourself the question: why is the price so low? I looked at the numbers and overall I think they are much stronger than the current price reflects. So I have that suspicious sort of feeling that something isn't right. Maybe you guys can see something in some of the following:

Although MTH had a good one-year sales growth of 31%, the industry had better at 40% sales growth. Income growth over the last year looks even worse: -43% for MTH and 10% for the industry.

Profit margins have been falling four straight years from 30% in 95 to 6.4% today. Currently the industry average is 16.9%. That's a substantial difference.

The EPS estimated growth going forward is 14% for MTH and about the same for the industry.

So I guess the big subject is, where is all of the money going compared to the industry? While they are putting their sales dollars into profit, MTH is not. The obvious answer is that MTH is using the cash to grow the company. But if that were the case, MTH's EPS growth going forward should be better than the industry.

That's my humble analysis and it makes me go hmmmm -- what don't we know about this company? The P/E valuation, however, is staggeringly low compared to the industry, so maybe it is indeed a good value. Is there a good explanation for the low profit margins? If there is, I may be in.

Moto



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