{"id":100055,"date":"2021-08-20T10:30:00","date_gmt":"2021-08-20T14:30:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=100055"},"modified":"2022-11-21T09:47:54","modified_gmt":"2022-11-21T14:47:54","slug":"2q21-earnings-3-long-ideas-poised-for-post-pandemic-growth","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/stocks\/2q21-earnings-3-long-ideas-poised-for-post-pandemic-growth\/","title":{"rendered":"2Q21 Earnings: 3 Long Ideas Poised for Post-Pandemic Growth"},"content":{"rendered":"\n

After 2Q21 earnings, long-term tailwinds give these three <\/a>Long Ideas<\/a> excellent opportunities to grow profits. This week\u2019s Long Ideas are Meritage Homes Corp (MTH: $111\/share), The Hershey Company (HSY: $180\/share), and Packaging Corporation of America (PKG: $140\/share).<\/a><\/p>\n\n\n\n

We leverage more reliable fundamental data<\/a>, proven in The Journal of Financial Economics<\/a>[1]<\/a>, with qualitative research to highlight these firms whose stocks present excellent risk\/reward.<\/p>\n\n\n\n

Figure 1: Long Idea Performance: From Date of Publication Through 8\/3\/2021<\/strong><\/h2>\n\n\n\n
\"Long<\/figure>\n\n\n\n

Source: New Constructs, LLC
Performance measured from the date of publication of first Long Idea report for each stock. Dates can be seen in each company section below. Performance represents price performance and is not adjusted for dividends.<\/p>\n\n\n\n

Meritage Homes Has 73%+ Upside<\/strong><\/h2>\n\n\n\n

We made Meritage Homes a Long Idea in <\/a>June 2020<\/a> as part of our \u201cSee Through the Dip<\/a>\u201d thesis. Since then, the stock has outperformed the S&P 500 by 6% and still has more upside.<\/p>\n\n\n\n

What\u2019s Working: <\/strong>The firm\u2019s 2Q21 gross margin of 27% was the highest in company history. Even as the availability of lots<\/a> ready for home construction continues to fall, Meritage Homes expanded its community count from 203 at the end of 1Q21 to 226 at the end of 2Q21. In 2Q21, the firm increased its total lots controlled from 43 thousand to 63 thousand, or 48% year-over-year (YoY).<\/p>\n\n\n\n

The firm continues to focus on entry-level housing. 81% of the firm\u2019s total orders in 2Q21 were company-defined entry-level homes, which is up from 70% in 2Q20. Meritage Homes typically aims to keep the average sales price (ASP) of entry-level homes within Federal Housing Administration (FHA) mortgage limits which vary by county and can range from $356 thousand to $822 thousand across the U.S. The focus on the lower end of the market has been prudent for the firm. According to the Census Bureau<\/a>, ~73% of homes sold in 1H21 were priced between $200-$500 thousand. The firm\u2019s ASP on homes closed in 1H21 was $380 thousand.<\/p>\n\n\n\n

The COVID-19 pandemic accelerated<\/a> the migration of people from urban centers to the suburbs, which contributes to long-term demand for entry-level housing. As the firm continues to shift its business to serve this segment of the market, demand for its homes is likely to remain strong over the medium term.<\/p>\n\n\n\n

We also expect the influx of institutional investors buying single-family homes<\/a> to continue driving growth in the housing market.<\/p>\n\n\n\n

What\u2019s Not Working: <\/strong>Meritage Homes is struggling to meet elevated comps from 2020 as the number of home orders fell by 2% YoY in 2Q21. However, the firm\u2019s ASP on orders is up 18% YoY in 2Q21, which drove a 16% YoY increase in home order value.<\/p>\n\n\n\n

The monthly supply of houses<\/a>, a ratio of houses for sale to houses sold rose from 3.8 months of supply in December 2020 to 6.3 in June 2021. While the current monthly supply ratio is in line with the historic average since 1963, should the supply of houses continue to rise, Meritage could have a more difficult time selling its inventory without a drop in prices.<\/p>\n\n\n\n

Despite Recent Gains, MTH Is Still Priced for Permanent Profit Decline:<\/strong> Meritage Homes\u2019 price-to-economic book value (PEBV<\/a>) ratio is 0.4. This ratio implies that the market expects Meritage Homes\u2019 profits will permanently decline by 60%.<\/p>\n\n\n\n

Below, we use our reverse discounted cash flow (DCF) model<\/a> to analyze the expectations for future growth in cash flows baked into a couple of stock price scenarios for Meritage Homes.<\/p>\n\n\n\n

In the first scenario, we assume Meritage Homes\u2019:<\/p>\n\n\n\n