As we've all seen, homebuilders have been hit particularly hard by the recession. However, I think there is the sense that demand for housing will eventually pick up and that share prices of the well-known builders (at least the survivors) will follow suit. In the long haul, I believe that homebuilders might show some promise.
IN PICTURES: How To Make Your First $1 Million
Though I have faith in the homebuilder market, I still have mixed feelings about the planned combination of Pulte Homes (NYSE:PHM) and Centex (NYSE:CTX).
In case you missed it, on the morning of Wednesday April 8, it was reported that the two homebuilders plan to join forces in a $1.3 billion stock deal, a deal that includes $1.8 billion in debt. The talk is that the deal could close as early as the third quarter. There are a number pros and cons for this merger, and I think it best to weigh them out before investors jump in.
When two large companies in the same industry merge, there are usually redundancies that can be eliminated by combining forces. For example, I think that the two companies could pare down office space, and things like two CFOs and CEOs probably won't be needed either.
According to a press release detailing the deal: "Pulte expects that efficiency gains and other savings from this transaction should generate cost reductions of approximately $350 million annually, consisting of approximately $250 million in overhead savings and $100 million in debt expense relief, resulting from the expected retirement of debt maturities in excess of $1 billion prior to year-end 2009." I think that this type of money is sure to turn some heads given the current housing climate. (Read more about mergers in our Mergers and Acquisitions Tutorial.)
An AP article also points out that this merger "will create the nation's largest homebuilder and could spark further consolidation in an industry that is suffering the worst real estate recession in a generation." That certainly sounds positive, and assuming that the deal goes through, my assumption is that it would receive a lot of attention as the largest homebuilder. Also, I think that further consolidation could spark excitement within the sector.
On the subject of consolidation, some might say that Toll Brothers (NYSE:TOL) is a terrific builder with a lot of longer-term promise. In addition, TOL has a big foothold in the northeast, and could make an attractive acquisition target. However, I suspect that naysayers might argue that their niche in higher-end homes could scare off some would-be buyers. Perhaps a combination or pairing with California based KB Home (NYSE:KBH) might make sense at some point, but that remains to be seen.
Hovnanian (NYSE:HOV) also has a pretty heavy presence in the U.S. northeast and a pretty good reputation, but the company's expected to ooze red ink this year and next, and I think that might scare off suitors.
Though there seem to be lots of positive aspects to this merger, I still foresee some problems for Pulte and Centex.
Management has set a cost-savings goal, which I think is a good thing. I generally like when management teams try to quantify things in terms of dollars and cents for investors. But, will it be able to hit those targets if the demand for new homes remains in the tank?
Also, there has been a lot of excitement generated on CNBC and in other financial outlets about this potential combination, but if demand for housing doesn't bounce back in the near-term I think that the novelty could wear off rather quickly.
Incidentally, how would the combined company's earnings look? Investors should note that Pulte was expected to generate a loss of $1.61 a share this year and to earn a whopping 9 cents in 2010. Meanwhile Centex was expected to lose money both this year and in the next year. In short, I think it could still be a few quarters before this becomes a serious earnings story.
The Bottom Line
When weighing the pros and cons of the possible Pulte/Centex merger, it seems to almost come out even. Even after taking these factors into account, my feelings remain mixed. (When major corporate transactions have a big impact on the currency markets, you can benefit, see Mergers And Acquisitions - Another Tool For Traders and The Merger - What To Do When Companies Converge.)
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
EconomicsWill remaining calm and staying long present significant risks to your investment health?
Stock AnalysisIs DKS a bargain here?
Investing NewsA third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
Stock AnalysisHome Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
Stock AnalysisYelp investors have had reason to be happy recently. Will the good spirits last?
Stock AnalysisWalmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
SavingsUnderstand how the problems of ultra-high-net-worth individuals (UHNWIs) are different from ordinary problems, and identify the unique financial challenges they face.
Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>