Investors are spoilt for choice with housebuilders listed on the stock market. Many investors may not look beyond the big three FTSE 100 firms, Taylor Wimpey (LSE: TW), Barratt Developments (LSE: BDEV) and Persimmon (LSE: PSN). But there are also a number of mid caps and smaller companies you could consider. One of these is FTSE 250 firm Bovis Homes (LSE: BVS), which today released a half-year trading update.
Bovis operates across the country, but with about three-quarters of sales in the flourishing south. The company said today that it achieved a record number of completions in the first half, and continued to acquire high quality land at attractive prices.
Management told us: “we are on track to deliver our expected growth for 2015 and a further increase in return on capital employed supported by robust profit margins and improved capital turn”.
There’s no sign of the imbalance between supply and demand in the housing market shifting any time soon, and Bovis is naturally upbeat about the “positive backdrop of robust market conditions”.
Similar confidence was expressed by Persimmon in a trading update last week, and I’m expecting Taylor Wimpey and Barratt to be equally bullish when they update the market on Wednesday and Thursday, respectively.
With favourable industry conditions for the foreseeable future and strong performances by the companies continuing apace, how are valuations looking for investors? The table below shows some key ratios for the current calendar year.
| P/B | P/E | PEG | |
| Bovis | 1.7 | 11.3 | 0.4 |
| Taylor Wimpey | 2.4 | 12.8 | 0.4 |
| Barratt | 2.4 | 13.1 | 0.5 |
| Persimmon | 3.1 | 13.6 | 0.8 |
Bovis’s 1.7 P/B (price-to-book based on tangible assets) looks very attractive compared with its peers. On the P/E (price-to-earnings) measure, all four companies trade below the long-term FTSE 100 average of 14, but Bovis’s 11.3 is the standout value. Similarly, all four companies trade below the PEG (P/E divided by earnings growth) fair value marker of 1, but Bovis has the best-value rating, along with Taylor Wimpey.
Bovis does have a lower forecast dividend yield (3.5%) than the others (Taylor Wimpey and Persimmon are as high as 4.9%), but I think that’s more than compensated for by the significant discount of Bovis’s P/B, P/E and PEG.
Furthermore, Bovis’s relative valuation becomes even more attractive if we look forward to 2016. While analysts see Taylor Wimpey, Barratt and Persimmon delivering very decent mid-teens earnings rises, Bovis is forecast to punch a superior 20%. As a results, Bovis’s P/E enters real bargain-basement territory of below 10.
So, while all the housebuilders currently appear set fair to make further gains, Bovis seems to have the greatest upside potential.
Of course, as investors, we shouldn’t focus only on what could go right, but also on what could go wrong. After booming earnings growth over the last few years, which is set to continue in the near-term, we would be foolish to think this is a “new normal”. It’s never “different this time” when it comes to the housebuilding industry: sooner or later boom turns to bust, and monitoring your investments closely in this sector is a must.
