Homebuilder Meritage Homes (NYSE: MTH) missed Wall Street’s revenue expectations in Q3 CY2025, with sales falling 10.8% year on year to $1.42 billion. Next quarter’s revenue guidance of $1.5 billion underwhelmed, coming in 3.2% below analysts’ estimates. Its GAAP profit of $1.39 per share was 14.3% below analysts’ consensus estimates.

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StockStory’s Take

Meritage Homes’ third quarter was shaped by persistent affordability concerns and declining consumer confidence, which management said led to softer-than-expected demand across many markets. CEO Phillippe Lord pointed to the company’s emphasis on move-in ready homes and a 60-day closing-ready guarantee as key tactics to maintain sales momentum, but acknowledged that increased use of incentives was necessary to support absorption rates. CFO Hilla Sferruzza noted that the broader incentive environment and higher land and lot costs drove margin compression, with the company opting not to sacrifice long-term land values for short-term sales gains.

Looking forward, management’s guidance reflects continued caution around the pace of housing demand recovery, with expectations for ongoing high incentive usage and limited margin improvement. Lord stated that while lower mortgage rates and a potential stabilization in consumer psychology could quickly shift the landscape, the company does not anticipate a near-term pullback in incentives. Sferruzza emphasized that any improvement in profitability will likely hinge on both a moderation in incentives and a greater ability to leverage cost efficiencies as community count grows.

Key Insights from Management’s Remarks

Management attributed the weaker quarter to challenging buyer psychology, aggressive discounting, and a need to preserve land values, while highlighting operational efficiencies and market share gains in select regions.

• Increased incentive usage: Management reported a heavier reliance on customer incentives and discounts to maintain sales volumes, attributing this to buyers’ affordability concerns and hesitancy amid economic uncertainty. Lord said, “Our customers were feeling less optimistic about the economy, the cost of living and employment, which increased hesitancy around a home purchase decision.”
• Spec home strategy impact: The company’s focus on move-in ready (spec) homes and a 60-day closing-ready guarantee enabled faster backlog conversion and asset turnover, but also meant that a high proportion of deliveries stemmed from intra-quarter sales rather than a traditional backlog.
• Cycle time and operational gains: Meritage continued to drive shorter construction cycles, reducing average cycle times to approximately 105 days and further optimizing its inventory management. This contributed to a 211% backlog conversion rate as the company moved to quickly close sales and manage working capital.
• Land acquisition and pipeline discipline: The company intentionally slowed land acquisition and starts, reducing new lot purchases by about 70% year-over-year, to maintain a balanced supply pipeline and avoid taking on higher-cost land in an uncertain market.
• Market share shifts: While market conditions varied by region, management highlighted strong absorption in Dallas, Houston, Southern California, and the Carolinas, and noted that the company’s value proposition was gaining share against both existing home inventory and other affordable builders.

Drivers of Future Performance

Management expects the near-term outlook to remain challenging, with incentives, affordability, and buyer psychology as primary factors shaping future results.

• Sustained incentive burden: Management anticipates that incentive usage will remain elevated throughout the next quarter, driven by continued consumer hesitancy and a highly competitive market. Lord noted that “the incentive burden [will] continue running far north of where we typically are as an industry for the near future.”
• Community count growth: Meritage expects to maintain double-digit community count growth into 2026, which should support volumes even if demand remains subdued. However, new communities are projected to come online at similar margin profiles to current levels, as higher land costs and incentives persist.
• Margin recovery contingent on market: Both Lord and Sferruzza emphasized that any meaningful improvement in margins will require a moderation in incentives and further stabilization in land and input costs. Management’s long-term gross margin target remains 22.5%-23.5%, but reaching this depends on a stronger housing market and improved buyer sentiment.

Catalysts in Upcoming Quarters

In the quarters ahead, key indicators to watch include (1) whether incentive usage begins to taper as consumer sentiment stabilizes, (2) the pace and profitability of double-digit community count growth, and (3) improvements in cycle times and inventory turnover. Execution on cost controls and the ability to leverage operational scale amid ongoing margin pressures will also be crucial indicators of Meritage’s performance.

Meritage Homes currently trades at $67.08, down from $71.02 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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