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Value Line has initiated coverage of Meritage Homes (MTH) in its flagship product, The Value Line Investment Survey. Meritage builds and sells single-family homes for first-time, move-up, luxury, and active adult buyers across the Western, Southern, and Southeastern United States, with base prices starting from under $100,000. As of March 31, 2013, the company had 168 actively selling communities in 16 major markets in seven states: California, Arizona, Nevada, Colorado, Texas, Florida, and North Carolina. Meritage is headquartered in Scottsdale, Arizona and has more than 800 full-time employees. Based on 2012 closings, it is the ninth-largest U.S. homebuilder.

The company was founded in 1985 and has built and sold more than 75,000 homes in its 27-year history. Its stock began trading on the New York Stock Exchange on January 2, 1997 under the name Monterey Homes. Later that year, Monterey merged with Legacy Homes and adopted the Meritage name in 1998. The company effected two-for-one stock splits in April of 2002 and January of 2005.

The housing crisis that occurred several years ago hit Meritage hard. Its concentration in the worst-affected states (California, Nevada, Arizona, and Florida) was especially problematic. At its low point during the recession (in November of 2008), the share price fell below $7.00. The company posted sizable losses (including write-offs and impairment charges) in 2008 and 2009.

Meritage has benefited from the recovery in the housing market since new home sales hit their nadir in 2010. Since then, the company entered Raleigh-Durham, North Carolina and Tampa, Florida in 2011, followed by Charlotte, North Carolina in 2012. By any measure, results improved significantly in 2012. Net income, the number of homes closed, gross margin, and backlog rose substantially. Management believes that the recovery is still in its early stages, and was optimistic enough that it invested $480 million in land and development last year. Meritage’s goal is to maintain a four- to five-year supply of lots. The company’s strong performance continued in the March quarter of 2013. Since the start of 2012, the share price has risen more than 80%.

The risk factors for investors should not come as a surprise. The state of the housing markets (and the economy, more generally) in Meritage’s markets is the most critical factor, and the company’s lack of geographic diversity makes it even more susceptible than homebuilders with a broader presence. A rise in mortgage rates or a decline in mortgage availability would be negative factors. If federal tax law is changed to eliminate the deductibility of mortgage interest for homeowners, that would hurt homebuilders. Meritage has never paid a dividend, making its shares unsuitable for income-oriented investors, and the volatility of its stock makes it too risky for conservative accounts. Investors with a long-term bent should note the cyclical nature of Meritage’s business.

For a more thorough look at Meritage’s business prospects, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.