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.

Potential Earnings
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.)

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  3. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  4. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
  5. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Fundamental Analysis

    Is a U.S. Industrial Recession on the Horizon in 2016?

    Find out why the industrial economy may be teetering on an industrial recession and what could prevent it from going over the cliff.
  8. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  9. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  10. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    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 >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Trading Center