Meritage Homes (NYSE:MTH) Experiences Growth in Returns on Capital

Meritage Homes Corporation (NYSE:MTH), a leading homebuilder in the United States, has demonstrated impressive growth in returns on capital (ROCE) over the past five years. The company's strategic initiatives and effective capital allocation have contributed to this significant improvement in ROCE, which has increased from 10.49% in 2019 to 17.19% in 2024. This article will delve into the specific strategies implemented by Meritage Homes to achieve this remarkable growth in returns on capital.

One of the key strategies implemented by Meritage Homes to boost returns on capital is the pivot in their strategy to affordable, quick-turning move-in ready homes. This shift has generated higher home closing revenue and increased the company's third quarter closing volume. In the third quarter of 2024, Meritage Homes reported an 8% year-over-year increase in home closings and a record 145% backlog conversion rate, with nearly 45% of this quarter's closings also sold this quarter. This strategy has contributed to the company's 3,942 deliveries this quarter, combined with a home closing gross margin of 24.8% and SG&A leverage of 9.9%, resulting in diluted EPS of $5.34.

Another crucial factor contributing to Meritage Homes' impressive ROCE growth is the company's capital allocation strategy. Meritage Homes has effectively utilized both debt and equity to generate profits, as evidenced by its fluctuating return on total capital. In 2022, Meritage Homes achieved the highest return on total capital at 25.23%, indicating efficient utilization of capital. Although there was a slight decrease in 2023 to 16.06%, the company maintained a relatively strong performance, showing a robust ability to generate returns on the total capital employed. This consistent performance above 15% reflects Meritage Homes' effective capital allocation strategies and operational efficiency, which have contributed to creating shareholder value over the years.

Acquisitions and mergers have also played a significant role in Meritage Homes' ability to expand its capital base and increase returns on capital. The company has made strategic acquisitions to enter new markets and grow its business. For instance, in October 2024, Meritage Homes announced its entry into the Gulf Coast markets with the acquisition of the assets of Elliott Homes. This acquisition allowed Meritage Homes to expand its presence in the region and gain access to new customers and opportunities.

Additionally, Meritage Homes has made significant land acquisitions and investments to support its growth. In the third quarter of 2024, the company spent $659.4 million on land acquisition and development, putting nearly 7,800 net new lots under control. These land acquisitions have allowed Meritage Homes to increase its inventory and expand its offerings to customers.

Furthermore, Meritage Homes has returned capital to shareholders through dividends and share repurchases. In the third quarter of 2024, the company spent a combined $57.1 million on cash dividends and share repurchases. These capital allocation decisions have helped Meritage Homes maintain a strong balance sheet and generate returns for shareholders.

In conclusion, Meritage Homes' impressive growth in returns on capital can be attributed to several strategic initiatives, including the pivot to affordable, quick-turning move-in ready homes, effective capital allocation, and strategic acquisitions and land investments. These factors have contributed to the company's strong financial performance and shareholder value creation. As Meritage Homes continues to execute on its strategic plan, investors can expect the company to maintain its impressive ROCE growth and generate value for shareholders.