Goldman sees homebuilder rallying 30% even if mortgage rates stay high

Homebuilder Meritage Homes could see outsized growth even in the midst of a housing lull, thanks to a strategy that emphasizes homes that are “move-in ready,” according to Goldman Sachs. Existing home sales remain sluggish and housing turnover below historical norms due to affordability issues for consumers hit by higher mortgage rates. But even against a backdrop of tight housing supply, Goldman analyst Susan Maklari expects Meritage to outshine competitors owing to a unique strategy. Maklari upgraded the real estate development company to buy from neutral and raised her price target by $30 to $235, implying 32% potential upside for the underperforming stock, which is up just about 3% this year. “We believe Meritage’s strategy of offering quick close, move-in ready new homes leaves it well-positioned for above average growth as we believe they offer a more compelling alternative to existing units,” Maklari said in a note on Thursday, seeing the company’s return on equity to rising to 14.8% through 2025 from 14.1% last year. “As such, we see the current valuation as an attractive entry point,” the analyst said. Maklari believes Meritage is poised for further upside to its 2028 targets because the company offers a competitive proposition to buyers. Meritage provides a “turnkey solution” to consumers — fully outfitted units that don’t need add-ons — with a 60-day closing guarantee on homes. Consumers are offered an extension of a spec-driven operating model with a focus on entry-level and first move-up segments, the analyst added, referring to homes for first-time buyers and those wishing to upgrade. Meritage also forecasts having 100% of its homes sold through realtors, adding confidence to first-time buyers’ decision-making process. These differentiating factors will let Meritage grow to serve about 400 communities by 2028, reaching a target of 20,000 annual closings, 41% above the pace of the quarter just ended, Maklari said. The company’s recent acquisition of Elliott Homes will also boost its sales pace. “In our view, this leaves [Meritage] well positioned to effectively compete with existing units despite a more challenged sales environment, making us increasingly confident on the outlook for revenues and profitability as conditions normalize,” the analyst said. MTH YTD mountain Meritage shares have lagged the market in 2024.