Pulte Homes Inc.PHM

The value of Centex's inventory was written down by an additional $855 million (from its June 30 value) before it went onto Pulte's books. The reason is that the impairment testing is more stringent for acquisition accounting than for the standard FAS 144 tests. As a result, investors can be more confident that impairments will be materially lower going forward, as the Centex land has been subject to a very stringent test.

Financial forecasts put forth in 2009 merger documents indicate that Pulte management agrees with us that book value erosion will be largely halted after this year. Its forecast calls for about break-even earnings before interest and taxes next year.

Pulte is now the best-armed builder in terms of land. As opposed to the downturn in the early 1990s, this cycle may result in less bargained-priced land being available to the big builders, several of which have very liquid balance sheets. If the housing market has indeed stabilized, Pulte's large land balance may turn out to be a big advantage.

Recent comments from several homebuilding CEOs indicate optimism that the worst downturn in 70 years may be nearing an end. Order growth across the industry is picking up, average prices may be stabilizing, and several builders have been shopping for land for the first time in years. Read more 

While improved, margins have a ways to go before the firm can reach solid profitability. At about 10% in the third quarter, Pulte's housing gross margin was improved from the second quarter, but below the year-ago result.

Pulte's trailing selling, general, and administrative expense ratio, at more than 16% of sales, needs to be significantly lower before profitability ensues. Incremental volume gained through the Centex merger should help, but much needs to be done. Read more