With uncanny precision?
By Wolf Richter for WOLF STREET.
The deal came up during D.R. Horton’s earnings call with analysts, without the two companies being named. The analyst posing the question referred to it as “a large acquisition by an offshore player of a domestic homebuilder,” and everyone knew what he was talking about.
One of Japan’s largest homebuilders, Sekisui House, had agreed to buy US homebuilder MDC Holdings on January 18 for nearly $5 billion, or $63 a share, a 19% premium over the prior day’s closing price, and a 41% premium over the 90-day volume-weighted average trading price. Sekisui House has been buying smaller and regional homebuilders in the US since 2017. But MDC will be its largest acquisition in the US.
Sekisui House’s bid was impeccably timed after the huge rate-cut-mania rally that had kicked off in early November and had driven some homebuilder stocks to all-time highs
But D.R. Horton’s earnings call had sent homebuilder stocks skidding, now for the second day. D.R. Horton shares [DHI] fell 9.2% yesterday and another 2.7% today, to $139.21, the lowest since December 12. The company disclosed that gross profit margins narrowed by 2.2 percentage points quarter-to-quarter, as the massive costs of mortgage-rate buydowns came home to roost.
The three-year chart also shows the dizzying rate-cut-mania rally starting at the beginning of November, and how the stock has tripled since February 2020. So January 18 was a good time to buy a homebuilder?
And the other homebuilder stocks also sagged yesterday and today. The exception was MDC, whose stock was propped up by the $63-a-share purchase price written into the merger agreement; it just dipped a little to $62.62.
The Homebuilders ETF [XHB] rose to an all-time high on January 22, two trading days after the Sekisui-MDC deal was announced.
The ETF – in addition to homebuilders, it includes big retailers, such as Home Depot and Lowe’s, building materials suppliers, and other companies related to the housing construction and remodeling industry — has doubled since February 2020. The announcement of the acquisition of MDC had fueled a two-day rally on hopes for more big acquisitions before D.R. Horton poured cold water on it yesterday. The ETF has now sagged for the second day in a row.
With buyers stretched by sky-high prices and mortgage rates that have doubled over the past two years, and with builders having to offer smaller and lower-priced homes and having to buy down mortgage rates aggressively at a substantial cost to keep sales from collapsing, as they have already collapsed for existing homes, while their stocks are perched at all-time highs, it’s now a perfect time for Sekisui House to buy a big US homebuilder, no?
During the D.R. Horton earnings call, the analyst wanted to know if D.R. Horton, which had become the largest homebuilder in the US in part through a series of acquisitions, would also go out and buy a big one because that stuff gets Wall Street all excited.
But CEO Paul Romanowski brushed it off. He said, “we’re more interested in the smaller tuck-in builders that may add to our market share in an existing market or give us some entry,” and he added, “I don’t see on the horizon a significant large acquisition.” So that was that. More cold water.
Surely, it took weeks from the beginning of the talks between Sekisui House and MDC to when they signed the merger agreements on January 17. So they may have started talking during the rate-cut-mania, when only the sky was the limit. And it sure looks like a bell getting rung at the top for homebuilder stocks, when a foreign company makes a big acquisition in the US during a mania-rally, just when the housing market has gotten very complicated and difficult.