$52.77
$140.16
bear $52.77
base $103.81
bull $140.16
margin of safety $45.00
market price* $59.17
Meritage Homes builds entry-level and first move-up houses in twelve states, from Arizona, California, Colorado and Utah in the West to Texas, Tennessee and six Southeastern states. Nearly all its homes are started before a buyer signs (spec homes) from a simplified set of plans, and nearly all land it bought in 2025 is for entry-level communities. It is a cyclical business: earnings depend on mortgage rates, buyer confidence and land costs. How we measured earnings. A homebuilder's land and houses under construction run through its operating cash flow, so reported cash flow swings with how fast it is buying land rather than how much it is earning: in 2024, its second most profitable year, reported operating cash flow was negative $228 million because inventory rose by almost $1 billion. We removed those inventory and working-capital swings, and also deducted stock compensation and the equipment spending needed to stay in business. On that basis the business earned roughly $152 million in 2016, rose to $1.0 billion in the 2022 boom, and fell back to $512 million in 2025. Our figure for 2025 is above reported net income of $453 million mainly because $39 million of terminated land deals written off in the fourth quarter are non-cash charges; we treat them as a one-time event, not ongoing earnings. Interest is expensed through the cost of homes sold, so we add it back to measure what the business earns before its lenders, then subtract the debt separately. The normal level. Over the last ten years, a span that includes a modest-sized business in 2016 to 2019, the pandemic boom and the current slowdown, the median of what the business earned before interest is about $7.45 a share on today's 66 million shares, roughly $490 million a year. We use the whole decade because the boom years alone would overstate normal profits and the current slowdown alone would understate them. What is happening now. Conditions have weakened sharply. Home closing gross margin fell from 24.9% in 2024 to 19.7% in 2025 as buyers needed ever larger mortgage-rate buydowns, profit fell 42%, and first-half 2026 profit fell another 46% to $146 million. The company is shrinking inventory: it cut new lot purchases to about 5,500 in 2025 from 37,000 in 2024, and lots under control fell from 85,600 to 77,600. Pre-interest earnings fell 34% in 2025; our base case assumes a further drop of about 38% in 2026 to roughly $350 million, in line with the first-half run rate, so we are not assuming the slide reverses on its own. Base case, about $103.81 a share. Earnings bottom near $350 million in 2026, recover to about $420 million in 2027 and $470 million in 2028, then run at the ten-year median of about $490 million indefinitely. We credit no growth beyond that level: new communities and a larger land pipeline depend on demand that is not secured, and we gave no credit for share buybacks. The business on this path is worth about $7.96 billion. Against that the company owes $1.85 billion, mostly senior notes of $300 million due 2027 at 5.125%, $575 million of convertible notes due 2028 at 1.75%, $450 million due 2029 at 3.875% and $500 million due 2035 at 5.65%, and it held $807 million of cash at June 2026. Keeping about $100 million for operations and allowing for the low fixed coupons on the 2028 and 2029 notes, net debt is about $1.09 billion, leaving roughly $6.87 billion, or $103.81 a share, for shareholders. The 2028 convertible only turns into shares above about $116, so we treat it as debt. Bear case, about $52.77 a share. Homebuilding has a well-documented history of deep downturns, and this company lived through one: in 2007 to 2009 its revenue fell by roughly two-thirds from the 2006 peak and it lost money for several years, mainly through land write-downs. The bear case runs one such downturn starting next year: pre-interest earnings fall from about $330 million in 2026 to $100 million in 2027, are negative by $100 million in 2028 and $50 million in 2029 as land is written down and homes are sold at discounts, then recover slowly to about $350 million a year, below the ten-year median, because land bought at today's prices earns lower margins. This matters more than it used to: 72% of controlled lots are now owned outright, up from 62% a year earlier, so less land risk sits with option sellers. The business on this path is worth about $4.63 billion; after about $1.14 billion of net debt (no credit for cheap coupons, since in this case refinancing 2027 to 2029 maturities would be at worse terms), shareholders keep about $3.49 billion, or $52.77 a share. The company can carry its debt through such a downturn because a homebuilder that stops buying land turns its inventory into cash, as Meritage did in 2008 to 2010 and as it is doing now: first-half 2026 operating cash flow was $291 million while inventory fell $132 million. Bull case, about $140.16 a share. Margins recover as current lot costs and incentive levels ease, and earnings climb back to about $650 million a year by 2029, a level well inside what the business actually achieved in 2021 to 2024 with today's entry-level, all-spec strategy, then hold there. The business is worth about $10.36 billion; less $1.09 billion of net debt leaves $9.27 billion, or $140.16 a share. What we are most likely wrong about. First, the normal level: if the 2021 to 2024 years were a once-in-a-generation shortage of homes for sale rather than a repeatable peak, the true median is closer to the 2016 to 2019 earning power, which, scaled to today's larger community count, is nearer $350 million to $400 million, roughly the bear case's recovery level. Second, land: with 72% of lots owned and $5.9 billion of real estate on the books, a long downturn could force write-downs larger than in our bear case. Third, the dilution from the 2028 convertible if the shares rise above $116 is partly offset by capped calls the company bought up to about $175. Margin-of-safety price. We are reasonably confident about the long-run earning power of a builder this size in these markets, but not about the timing of the cycle, and current results are still falling. The worst plausible outcome is a repeat of 2007 to 2010; the balance sheet, at about 26% debt to capital with investment-grade ratings and no maturity before 2027, would survive it, but shareholders would see several years of losses and book value written down from about $78 a share. If we are wrong about the normal level and a downturn arrives, the shares are worth roughly $50 to $55. The price assumes a three-to-five-year holding period, during which the company pays about $1.96 a share a year in dividends while repurchasing shares. From $45 a share, roughly 58% of book value, the bear case implies a small gain plus dividends, and a recovery to anything near the median earning power over four or five years implies well over 20% a year. That is the highest price at which we estimate the 20% target holds across the range of outcomes, so the margin-of-safety price is $45. Change since our previous analysis. Our previous estimates were built on a different measurement of earnings and are not comparable. Since then, the business news has been negative: first-half 2026 profit fell 46%, and we have pushed the expected trough lower and later than before.