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Meritage actually reported a big drop in its GAAP earnings in the quarter. However, like many large companies in the fourth calendar quarter of , the company took a substantial charge to deferred tax assets on its balance sheet related to the passing of the Tax Act, which lowers the value of those assets toward future tax savings. However, it's worth pointing out that the long-term benefit of a lower federal tax rate will contribute significantly more to Meritage's bottom line than this onetime charge will cost.
Meritage reported a In its earnings presentation, Meritage explained the two big catalysts behind its "strategic focus" on the entry-level market:. In addition to skating to where the puck will be, Meritage is also taking advantage of the margin-boosting potential for starter homes, which it can build a higher percentage of on speculation.
Spec homes generally sell for higher profit margins, and there's less risk with entry-level homes on spec, since there is less need or demand for customization that can add to the build cost or cause a spec property to remain unsold for a longer period. Meritage is betting big on the entry-level market driving substantial demand in the years to come. Over the past year, Meritage Homes' focus on this segment has paid off, and a lower federal tax rate is set to boost its earnings even more in There are sure to be ups and downs as the housing market goes through its normal -- and healthy -- cycles of demand.
But if the pent-up demand for starter housing is as strong as it seems to be, the company's strategic shift could pay off for years to come. Jason Hall owns shares of Meritage Homes. The Motley Fool recommends Meritage Homes.
The Motley Fool has a disclosure policy. A Fool since , he began contributing to Fool. Trying to invest better? Like learning about companies with great or really bad stories?
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