Meritage Homes CORP (MTH)·Q2 2025 Earnings Summary

Executive Summary

• Q2 2025 revenue and EPS modestly beat S&P Global consensus as Meritage leaned on move‑in‑ready specs to convert spring demand quickly; revenue was $1.62B vs $1.58B consensus and EPS $2.04 vs $1.97 consensus, though both declined materially year over year on lower ASPs from elevated incentives . S&P Global values denoted with * (see note).
• Home closing gross margin compressed 480 bps YoY to 21.1% (21.4% ex $4.2M terminated land charges) on higher incentive utilization and lot costs, partly offset by direct cost savings; SG&A deleveraged to 10.2% on lower ASPs and start‑up costs .
• Management withdrew full‑year guidance given high backlog conversion/low visibility and provided Q3 guardrails: revenue $1.4–$1.56B, home closing gross margin ~20%, EPS $1.51–$1.86, tax ~24.5%; land spend cut to ~$2.0B from $2.5B to support increased buybacks and dividends .
• Strategic narrative remains execution on spec‑driven, 60‑day closing model: cycle times improved to ~110 days, backlog conversion ~208%, community count hit a record 312 (+9% YoY), positioning for share gains despite macro headwinds .

What Went Well and What Went Wrong

• What Went Well

  • Spec strategy enabled rapid conversion and strong absorptions (4.3 per month) despite weak sentiment; “backlog conversion rate of 208%” with more than half of deliveries from intra‑quarter sales .
  • Operational execution: cycle time reduced from ~120 to ~110 days QoQ; direct cost per square foot down >1% YoY with improving labor availability .
  • Capital allocation pivot: land spend trimmed to $509M in Q2 and ~$2.0B for FY; returned $76M in Q2 via dividends and repurchases, “tripling our quarterly buyback commitment” .

• What Went Wrong

  • Margin pressure: home closing gross margin fell to 21.1% (21.4% ex charges) from 25.9% YoY on elevated financing incentives and higher lot costs; SG&A rose to 10.2% on commissions, start‑up overhead, and spec carry .
  • ASP compression: closings ASP down 6% YoY to $387K; orders ASP down 5% YoY to $395K, reflecting heavier incentive usage to meet affordability .
  • Visibility/guidance: Management withdrew full‑year outlook and guided Q3 gross margin to ~20% citing lost leverage from seasonality and low backlog, creating near‑term estimate uncertainty .

Financial Results

Revenue, EPS, margins vs prior periods

Versus S&P Global consensus (Q2 2025)

Note: * Values retrieved from S&P Global.

Segment breakdown (Q2 2025 vs Q2 2024)

KPI trends

Liquidity/capital

• Cash $930M; net debt‑to‑capital 14.6% at 6/30/25; debt‑to‑capital 25.8% .
• Q2 repurchases $45M (674K shares); Q2 dividends $0.43/sh ($31M); $219M remaining authorization at 6/30; revolver maturity extended to 2030 post‑quarter .

Guidance Changes

Subsequent to Q2: Board approved $500M increase to repurchase authorization (Aug. 21, 2025) .

Earnings Call Themes & Trends

Management Commentary

• “We generated home closing revenue of $1.6 billion and achieved home closing gross margin of 21.4% excluding $4.2 million in terminated land deal charges… diluted EPS of $2.04.” – CEO Phillippe Lord .
• “We reduced our land acquisition and development spend to $509 million this quarter, targeting around $2.0 billion for the full year, down from $2.5 billion previously… returned $76 million to shareholders in Q2.” – CEO Phillippe Lord .
• “Q3 margin guidance reflects the current incentive environment… and incorporates lost leverage from Q2 since we closed most of the spring selling season volume in Q2; July is one of our slowest sales months.” – CFO Hilla Sferruzza .
• “Our second quarter 2025 ending community count was 312 active stores, the highest in company history… We reduced construction time from ~120 days in Q1 to about 110 this quarter.” – CEO Phillippe Lord .
• “We can and will repurchase shares opportunistically… we spent $45 million to buy back over 674,000 shares in Q2.” – CFO Hilla Sferruzza .

Q&A Highlights

• Absorption and new community cadence: Q2 achieved 4.3/month; >50 new communities opened; expect even flow adds in H2 to achieve double‑digit year‑end growth; 2026 also expected double‑digit community growth .
• Capital allocation: With land spend trimmed by ~$500M vs plan, management intends to “press on the gas” on buybacks given perceived undervaluation, while funding specs for new community openings .
• Q3 gross margin dip: Primary driver is lost leverage (~75–100 bps) with July seasonality and low starting backlog; incentives not expected to rise sequentially from already high levels .
• Land costs and development: Land prices largely sticky; some opportunities to restructure terms; more competitive bids for development work suggest cost relief impacting P&L mainly in 2H26 .
• Broker strategy & resale competition: Maintain market‑rate co‑broke and consistent commissions; resale inventory returning but not head‑to‑head at entry level; rate buydowns more efficient than price cuts to solve monthly payment .

Estimates Context

• Q2 2025 beats: Revenue $1.624B vs $1.576B consensus; EPS $2.04 vs $1.97 consensus (modest beats) . S&P Global consensus figures marked with * (see note).
• Post‑print implications: Management’s Q3 revenue ($1.4–$1.56B) and ~20% gross margin guidance suggest consensus margin run‑rates may need to move lower near‑term, with potential 4Q re‑acceleration tied to seasonality and volume leverage, per CFO commentary .

Note: * Values retrieved from S&P Global.

Key Takeaways for Investors

• Spec‑driven 60‑day close model continues to convert demand swiftly and support share gains, but at the cost of lower ASPs and gross margins amid elevated rate buydowns .
• Near‑term earnings power is seasonally/operationally constrained: Q3 margin guided to ~20% with lost leverage; full‑year guide withdrawn—expect estimate volatility until visibility improves .
• Capital returns stepping up as land spend is throttled back: $76M returned in Q2; FY land spend trimmed ~$500M; subsequent $500M buyback authorization increase adds support on weakness .
• Cost undercurrents are constructive (cycle times improving; direct costs down; labor availability better), but meaningful land/development cost relief is more 2026‑timed per rebid activity .
• Watch regional mix: East is the growth engine (units and revenue up YoY) while West and Central showed softer volumes/values; mix will influence ASPs and margins .
• Tactical lens: Modest beat + Q3 margin reset + guide withdrawal is a mixed setup; upside skew hinges on incentive normalization and faster H2 absorptions from community adds, while downside risk is a slower macro/affordability backdrop .
• Medium‑term: Structural model changes (scale, spec strategy, broker integration) support management’s long‑term gross margin target of 22.5–23.5% in more “normal” conditions .