Is Merger Fever About to Hit the Homebuilders?
The algos don't understand value investing.
We may be on the cusp of a meaningful consolidation in the publicly traded homebuilder sector.
Image courtesy of jenningswire.com
The homebuilder sector delivered a pleasant surprise which no one seems to have noticed over the last few days, which is making me bullish as I patiently wait for a recovery in the housing market. Indeed, the $12 billion buyout of Landsea Homes (LSEA) by privately held New Home Co., part of the Apollo Global Management Group (APO) is likely the first installment of what could be an extensive consolidation period for the publicly held homebuilders.
Of course, the major theme remains the same. Landsea specializes in building homes in the sunbelt, which continues to be an underappreciated fact, and which gives New Home an established footprint in the rapidly growing area where homebuilders continue to run profitable businesses.
What makes this merger most interesting is that it signals that a trend, that I described in November 2024, where private homebuilders were gobbling each other up to increase their market share, has now moved to the publicly traded sector.
Here’s why this is important. There are plenty of highly profitable small to midsize publicly traded homebuilders whose share price is near their recent bottom due to the challenging housing market. Yet, quarter after quarter these companies continue to make money, albeit at a slower pace than over the last 12-24 months. Moreover, even as incentives and price cuts are now part of the landscape, margins remain stable, and no one has skipped a dividend.
In fact, most homebuilders have developed a build to order model where inventories are maintained at tight levels while increasing their building efficiencies, managing their lot development expenses, and cutting costs, while still buying back their shares at bargain prices.
When you put it all together, it’s not hard to see that the odds of more mergers are rising, as companies look to increase their market share.
The Prototype Target
It’s good to have a playbook, so here’s the profile of a perfect target company, Tripointe Homes. Full disclosure: I do not own shares in Tripointe Homes (TPH), and I do not have any insider information on whether it’s a takeover candidate. That said, here’s why I think TPH is the perfect model takeover candidate:
Market cap of $2.93 billion;
Heavy presence in the sunbelt featuring homes in Arizona, Texas, Florida, Colorado, and North Carolina
Solid earnings delivery: has beaten earnings expectations for the past five quarters;
10.82% year over year revenue growth in tough market;
Excellent value, selling at below 11 times earnings;
Strong Balance Sheet: $812 million in cash with only $1.06 Billion in debt
As the TPH price chart shows, which is highly representative of many publicly traded homebuilders, Wall Street has taken a pass over the last couple of years. That’s because the algos have no sense of value or patience. They just run to the next hot sector while ignoring the long term investment thesis.
But the price chart also shows that the OBV line is rising as the ADI line is falling. That setup suggests that value players (OBV) are building long term positions as short sellers (algos looking for quick bucks) are betting the shares can be driven down once again.
In the near term, the short sellers may be right, especially if there are negative external events. But note that as the tariff related volatility has raged, TPH and the homebuilders have continued to build a base, and that until proven otherwise, the April lows are likely the lows for the cycle.
Bottom Line
I am very encouraged by the Landsea buyout as it suggests that the consolidation phase in the homebuilders has expanded beyond the privately held small to midsize builders into the publicly traded space.
I continue to own shares in several homebuilders and have placed many of them in my long term oriented Weekender Portfolio. Unlike the algos, I can be patient.
Perhaps the one thing that continues to evade many investors is that the demand for new homes remains solid, and that supplies are still tight, although there are rising numbers of homes available in the existing home sector. Nevertheless, once mortgage rates fall, and it won’t take much of a sustained decline, expect a more robust pace of sales to unfold.
Before that happens, though, we may see a significant merger and acquisition cycle in the publicly traded homebuilders.
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