Monday, Credit Suisse downgraded Meritage Homes Corp. (MTH) shares to Underperform from Neutral and increased its price target to $14 from $12.50.
Analyst Oppenheim downgraded the stock as he anticipates weaker than expected second quarter results, with potential challenges in new orders. The analyst thinks that this will make it difficult for MTH to sustain its premium valuation.
The analyst's May Survey of R/E Agents pointed to slowing demand in Texas, which accounted for 66% of orders in first quarter, while traffic seen in other core markets such as AZ, CA and NV was driven primarily by demand for foreclosures. The analyst expects second quarter orders down 38% year-over-year, with downside risk based on a challenging comparison and as higher mortgage rates in late May and June likely weighed on sales.
The analyst said that recent data points to worsening inventory trends in TX, with 7.1 months of supply of homes for sale in March/April, the highest level since July 1997 (R/E Center at Texas A&M.) Rising inventory will likely pressure prices and margins further.
Future risk to book value, especially if TX weakens further. The analyst estimates $190 million of further impairments (37% of current book value) as a result of continued weakness in sales and pricing.
Meritage trades at 1.3x the analyst's adjusted book value estimate of $13.50, a 17% premium to the 1.1x group average and well above the 13% discount Meritage has traded at relative to peers since 2006. The analyst sees 20% downside to his new price target of $14, due to pressure from weaker orders and further impairments.
The analyst thinks Meritage is well-positioned from a liquidity standpoint, but expects weaker than expected sales and further impairments will narrow its premium valuation relative to peers.
Currently, MTH is down $0.70 or 4.07% and trading at $16.51.
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