TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.Buying Centex ( CTX) might keep Pulte Homes ( PHM) from sinking, but the deal isn't likely to generate returns for at least a year as the company wrestles with debt and the housing market struggles to stabilize. Pulte, the biggest publicly traded U.S. homebuilder, is buying Centex for $1.3 billion in stock in an attempt to survive a brutal housing slump and weak economy. While the acquisition will keep Pulte in the game, it won't reverse falling home prices, shrink the vast number of houses for sale or bring buyers back. And profitability might be a ways off. Analysts and economists have recently cited increases in housing starts as a sign that the real estate market has bottomed. The number of new houses being built increased 22% in February from January, according to the Commerce Department. However, Federal Reserve policy makers said they didn't view the rise as "the beginning of a new trend," according to meeting minutes released yesterday. In other words, a recovery is likely far off. The median home price has fallen 18% from a year earlier. Although sales have picked up, prices might drop more as buyers wade through the vast inventory of homes on the market. Pulte's stock fell 10% yesterday, bringing a one-year decline to 35%.Centex jumped 19%. Still, the company's shares have tumbled 64% in the past year. Pulte and Centex, hobbled by lower selling prices, lost a combined $1 billion in the most recent quarter. Sales fell by more than 40% at each company. Pulte expects to cut costs by $350 million through the deal.
All of the major homebuilders are rated "sell" by TheStreet.com Ratings. Pulte said it would have $1.8 billion in net debt after the deal. That's less than the $2.3 billion D.R. Horton ( DHI) had at the end of last year, but it's more than double the net debt at KB Home ( KBH) and Toll Brothers ( TOL). The combined company might gain an edge over rivals such as KB Home and MDC Holdings (MDC) based on its size and expanded geographic reach, but it will probably continue to lose money. The Commerce Department expects new home sales to remain depressed for the rest of the year. Centex Chief Executive Officer Timothy Eller said in a statement that the acquisition creates a company with "unrivaled firepower to capitalize on the opportunities in homebuilding that are becoming visible on the horizon." The merger seems more like an opportunity to avoid a bankruptcy filing. The near-term consequence is survival, not expansion. TheStreet.com Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research, click here now!