An Intrinsic Calculation For Meritage Homes Corporation (NYSE:MTH) Suggests It's 33% Undervalued

Simply Wall St.12-11

Key Insights The projected fair value for Meritage Homes is US$273 based on 2 Stage Free Cash Flow to Equity Meritage Homes' US$183 share price signals that it might be 33% undervalued Analyst ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAn Intrinsic Calculation For Meritage Homes Corporation (NYSE:MTH) Suggests It's 33% Undervalued\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-12-11 23:55 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://finance.yahoo.com/news/intrinsic-calculation-meritage-homes-corporation-155529908.html><strong>Simply Wall St.</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Key Insights\n\n The projected fair value for Meritage Homes is US$273 based on 2 Stage Free Cash Flow to Equity \n Meritage Homes' US$183 share price signals that it might be 33% undervalued \n  Analyst ...</p>\n\n<a href=\"https://finance.yahoo.com/news/intrinsic-calculation-meritage-homes-corporation-155529908.html\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"MTH","symbol_name":"Meritage Homes Corp","start_time":0,"source_url":"https://finance.yahoo.com/news/intrinsic-calculation-meritage-homes-corporation-155529908.html","article_id":"2490409895","we_media_id":null,"thumbnails":["https://s.yimg.com/uu/api/res/1.2/6ry1lSqabYRXpcHwCvmZMw--~B/aD00MzI7dz0xMTk0O2FwcGlkPXl0YWNoeW9u/https://media.zenfs.com/en/simply_wall_st__316/7715bc952676bef2d237800a14b80e8c"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2490409895","pubTimestamp":1733932529,"columns":[],"sourceInfo":{"source_id":"yahoofinance","name":"雅虎金融"},"weMediaInfo":null,"summary":"The projected fair value for Meritage Homes is US$273 based on 2 Stage Free Cash Flow to Equity. Meritage Homes' US$183 share price signals that it might be 33% undervalued. Analyst price target for MTH is US$216 which is 21% below our fair value estimate. How far off is Meritage Homes Corporation  from its intrinsic value?Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing the Discounted Cash Flow  model. Don't get put off by the jargon, the math behind it is actually quite straightforward.Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"MTH":"Meritage Homes Corp","DCF":"Dreyfus Alcentra Global Credit Income 2024 Target Term Fund, Inc","BK4100":"有线和卫星","FCF":"第一联邦金融","BK4211":"区域性银行","BK4088":"住宅建筑","NYSE":"纽交所","TV":"墨西哥电视"},"translate_title":"Meritage Homes Corporation(NYSE：MTH)的内在计算表明其价值被低估了33%","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"DCF":1,"FCF":1,"MTH":1,"NYSE":1,"TV":1},"content_text":"Key Insights\n\n The projected fair value for Meritage Homes is US$273 based on 2 Stage Free Cash Flow to Equity \n Meritage Homes' US$183 share price signals that it might be 33% undervalued \n  Analyst price target for MTH is US$216 which is 21% below our fair value estimate \n\n How far off is Meritage Homes Corporation (NYSE:MTH) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward. \n Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. \n See our latest analysis for Meritage Homes \n Is Meritage Homes Fairly Valued? \n We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. \n A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value: \n 10-year free cash flow (FCF) estimate \n\n\n\n\n2025\n2026\n2027\n2028\n2029\n2030\n2031\n2032\n2033\n2034\n\n\n Levered FCF ($, Millions) \nUS$544.8m\nUS$567.9m\nUS$587.5m\nUS$606.4m\nUS$624.7m\nUS$642.9m\nUS$661.0m\nUS$679.3m\nUS$697.7m\nUS$716.5m\n\n\nGrowth Rate Estimate Source\nAnalyst x3\nAnalyst x3\nEst @ 3.46%\nEst @ 3.21%\nEst @ 3.03%\nEst @ 2.91%\nEst @ 2.82%\nEst @ 2.76%\nEst @ 2.72%\nEst @ 2.69%\n\n\n Present Value ($, Millions) Discounted @ 8.3% \nUS$503\nUS$484\nUS$462\nUS$440\nUS$418\nUS$397\nUS$377\nUS$358\nUS$339\nUS$322\n\n\n\n(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$4.1b\n We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.3%. \nTerminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$716m× (1 + 2.6%) ÷ (8.3%– 2.6%) = US$13b\nPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= US$13b÷ ( 1 + 8.3%)10= US$5.8b\n The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$9.9b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$183, the company appears quite undervalued at a 33% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. \n\n\n\n  NYSE:MTH Discounted Cash Flow December 11th 2024\n \n\n The Assumptions \n The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Meritage Homes as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.3%, which is based on a levered beta of 1.389. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. \nSWOT Analysis for Meritage Homes\n\n\nStrength\n\nDebt is well covered by earnings.\n\n\nBalance sheet summary for MTH.\n\n\n\nWeakness\n\nEarnings growth over the past year underperformed the Consumer Durables industry.\n\n\nDividend is low compared to the top 25% of dividend payers in the Consumer Durables market.\n\n\n\nOpportunity\n\nAnnual earnings are forecast to grow for the next 3 years.\n\n\nGood value based on P/E ratio and estimated fair value.\n\n\n\nThreat\n\nDebt is not well covered by operating cash flow.\n\n\nPaying a dividend but company has no free cash flows.\n\n\n Annual earnings are forecast to grow slower than the American market.\n\n\nIs MTH well equipped to handle threats?\n\n\n\n Looking Ahead: \n Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Meritage Homes, there are three fundamental factors you should further research: \n\n Risks: Take risks, for example - Meritage Homes has   2 warning signs  (and 1 which doesn't sit too well with us)  we think you should know about. \nFuture Earnings: How does MTH's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.\n Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! \n\n PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.\nHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. 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