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Pulte Homes Inc (PHM)
First Major Consolidation in Home-Building Industry, Pulte Homes acquires Centex
The recession's first major consolidation in the battered home-building industry will take place with Pulte Homes agreeing to buy rival Centex Corp. (CTX: Charts, News, Offers) for about $1.3 billion in stock. The companies came to a deal after Centex lost 70 percent of its value in the past year, while Pulte lost 30 percent. Creating the largest U.S. homebuilder by revenue, both companies are betting that consolidation will increase the chances of surviving the worse housing crash since the Great Depression. Will their bet payoff?
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The combined companies will have a large presence throughout the country, selling homes in 59 U.S. markets. The merger gives Pulte access to states with stronger new home sales such as Texas and the Carolinas. It also gives Pulte, which has a strong brand for retirement housing, access to Centex's first-time home-buyer customers.The two companies together sold almost 40,000 homes last year. The combined company will be the largest U.S. home builder with a market capitalization of $4.1 billion, beating out D.R. Horton Inc. (DHI: Charts, News, Offers), with a market capitalization of $3.4 billion. "We were very excited to talk to a partner we felt was the best strategic fit for Pulte in the industry," Pulte CEO Dugas said in a statement. Complimentary geographic presence and market segments will mean big annual savings of up to $350 million annually for the new company. The savings includes $250 million in overhead and $100 million in debt-expense relief.
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"We're not suggesting we have a perfect crystal ball but we're cautiously optimistic about what we're seeing now," Dugas said CEO of Pulte. "The combination means we will return to profitability sooner than we would." U.S Fixed rates reached a record low last week of 4.78 percent as the Federal Reserve ramped up purchases of mortgage-backed bonds to support home lending. This combined with falling prices has lured some consumers to back into the housing market. February saw purchases of new homes in the U.S. unexpectedly rise in from a record low, increasing 4.7 percent, according to the U.S. Commerce Department. At the same time, median sales price fell 18 percent from February 2008, the biggest year-on-year drop since records began in 1964.
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The combined companies will have more than $3.4 billion of cash, the largest stock pile in the industry. In a world where cash is King, this gives the company a huge advantage because it will be much less reliant on banks for lending money for new projects. There have been signs that the housing markets have improved a bit but most anaylsts are expecting a long road to recovery. The markets greeted the news of the merger with mixed reviews. Shares of Centex soared over 20 percent in early trading while Pulte is down around 7 percent as of 11 AM.
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