Centex Corp. (CTX) reported an EPS from continuing operations of $.68, but the results were greatly improved by a $3.31 per share tax benefit. Revenue was down 49% overall, and 47% in the home building operations. Analysts had been predicting a loss of $1.17 on revenue that expectation was for a 50% drop from last year. Technically, Centex beat estimates and after surging at first, shares are settling right about even in after hours trading. Cost cutting saved the day yet again as the company said that it was able to lower SG&A costs by a whopping 47% or $135 million, the company reported net income of only $85 million in the quarter. So, without the extreme cost cutting Centex would have certainly lost money in the quarter, even with the huge tax gain.
Centex has entered into a definitive agreement with Pulte Homes (PHM), which would have Pulte acquire all of Centex shares for .975 of PHM for each 1 share of Centex. At the time, the merger was valued at $3.1 billion, including $1.8 billion of debt. Also, this deal represented a 32.6% premium to the 20-day volume weighted average price. Since April 8th when the two firms announced this agreement, it is not surprising that the stocks have traded pretty much in the same fashion. The two firms have set the date of August 18th for a vote of shareholders on the proposed merger. If accepted Pulte shareholders would own 68% of the company, while Centex owners would get 32%.
Over the last quarter, it appears Centex tried to make themselves as attractive to Pulte as possible. As discussed earlier, they slashed costs and tried to horde as much cash as possible to lessen the impact of the debt that the combined company would incur. They know these results will be fresh on the minds of both shareholders voting in two weeks. According to our methodology both Centex and Pulte are Overvalued at this time, there has been simply too much destruction to earnings and revenue for us to stand behind either of these companies at this point. We are starting to see some really positive signs that housing is stabilizing, but in our view there are certainly more attractive stocks in this market.
It is an interesting spot to be in for the shareholders of Centex. Centex easily beat what the street had called for, and in the process was able to generate positive cash flow from home building operations, and yet the stock has not moved in after hours trading after an initial spike. The reason is that Pulte also reported earnings that did not meet earnings expectations, but the quarter was not a loss as they were able to work through 42% of inventory. The stocks are so intimately tied right now, and neither one has budged more than an hour after results were released. Unless you foresee Pulte rising higher over the next two weeks after an uninspiring quarter, I would probably drop the shares now. Especially if, as an owner of Centex, you think there is a chance that the merger will not be approved by Pulte shareholders, thus removing the 32% premium.
