LOS ANGELES (AP) â¿¿ Shares of homebuilders rose Wednesday after a Citi Investment Research analyst suggested the sector is ripe for mergers and acquisitions, particularly if the economy fails to create a rebound in jobs and home sales remain sluggish into next year. In a research note, analyst Josh Levin said the sharp drop in new home sales in the months since federal homebuyer tax credits expired in April and weak economy, among other factors, raises the likelihood that management teams at the larger homebuilding companies will consider buying out smaller rivals. "Although it is difficult to quantify, our best assessment is that some consolidation is more likely than not if the outlook for job creation were to materially worsen or if the next spring selling season shapes up to be a bust," he wrote. New home orders and sales rose in the spring due to low mortgage interest rates and homebuyer tax credits. But the government incentives pulled demand forward and sales have weakened since the tax credit expired April 30. Sales of new U.S. homes collapsed in May, sinking 33 percent to the lowest level on record. Sales rebounded in June, but it was the second-weakest month on record. And high unemployment, slow job growth and tight credit continue to keep many people from buying homes, raising uncertainty over when sales will recover now that there's no government incentive for buyers. Builders such as D.R. Horton Inc., Lennar Corp., and PulteGroup Inc., have posted better operating results of late and are on a better track for profitability than smaller peers such as Beazer Homes USA Inc., KB Home, M.D.C. Holdings Inc.. and The Ryland Group Inc., Levin noted. He contends it will be difficult for the smaller builders to turn a profit without boosting the number of homes they sell. Whereas, larger builders can leverage overhead costs enough to achieve and maintain profitability, he said.
The most likely targets of a takeover are Ryland, Meritage Homes Corp., and Beazer, Levin said.He sees D.R. Horton, KB Home, M.D.C. and PulteGroup as most likely to attempt to acquire a rival builder. Investors took the consolidation speculation as a positive sign. Beazer shares led the sector rally, adding 24 cents, or 6.4 percent, to close Wednesday at $4.01. Shares of Hovnanian Enterprises Inc. jumped 10 cents, or 2.5 percent, to $4.09, while PulteGroup Inc. rose 8 cents to $8.36. KB Home added 29 cents, or 2.8 percent, to $10.81, while Lennar rose 20 cents to $13.48. D.R. Horton rose 15 cents to $10.62. Toll Brothers Inc. added 36 cents to $17.10. Ryland jumped 63 cents, or 3.8 percent, to $17.04, while Standard Pacific Corp. rose 8 cents to $3.79. Meritage added 87 cents, or 5.1 percent, to $17.90. MDC Holdings rose 73 cents to $27.62, while shares of NVR Inc. added $8.23 to $632.78.