Limited Upside Potential for MTH’s shares; MTH Off Conviction Buy List

Analysts at Goldman Sachs reiterate their "buy" rating on Meritage Homes Corp (NYSE: MTH)(FREE stock trend analysis), while removing the company from the Conviction Buy List. The six-month target price for MTH has been reduced from $28 to $26. Goldman Sachs has also reduced its estimates for the company.

According to Goldman Sachs, MTH is one of the first few builders that will start generating profits in 2010 with the help of its cost-cutting initiatives. MTH is also likely to benefit from its land acquisitions made in late 2008 and early 2009. Meritage Homes’ SG&A is extremely reasonable and there are indications of the company witnessing robust operating leverage in 2010. The write-downs made by MTH are unlikely to result in impairment risk in 2010.

However, MTH’s shares have risen by more than 38% over the past 52 weeks, as compared to a 27% rise in the S&P. Goldman Sachs believes that there is limited upside to MTH’s stock in the near term due to a potentially large impairment to inventories in 4Q09. The analysts have, thus, removed MTH from the Conviction Buy List, as there are better opportunities across the Financials business unit for the near term.

Goldman Sachs has reduced its EPS estimate for 4Q09 from -$0.20 to -$1.00.