Persimmon isn't predicting a house price crash, merely flat prices. Does this make it a buy?
Discussions of a possible house price crash have been heated on the Fool discussion boards. So far though, the crash hasn't materialised.
None the less, the stock market has marked down house builders, most probably in the expectation that a crash is imminent. From, an investor's point of view this makes the construction sector a possible value play.
Persimmon
(LSE: PSN)
, a house builder, released its interim results today. These show earnings per share up from 56.2p to 64.4p. The figures are fattened by the inclusion of the Westbury acquisition.
The acquisition was largely funded by debt. Last time I wrote about Persimmon I was concerned that they had borrowed too much money. Persimmon, however, has managed to reduce this debt, so that gearing now stands at only 50%.
Persimmon says that it had a land bank of 92,000 plots at the end of June. That's about 5 years' supply. If the average selling price of £181,000 is maintained, it equates to sales of £16.7 billion. If we assume margins of 19.9%, £76 million interest charge per year and a 30% tax charge, we can estimate a profit of £411 million in each of the five years, putting Persimmon on a price-earnings ratio of 9 at today's share price of £12.80. This is very close to the price-earnings ratio forecast by brokers of 8.6.
The estimate is based on flat house prices, which is probably prudent because in its outlook statement, Persimmon, while not predicting a house price crash, says "we do not however expect to see significant selling price increases above those already realised this year."
Despite being cheap, Persimmon doesn't look that much cheaper than its peers:
The companies that stand out are Ben Bailey and Oakdene. Both these perhaps deserve their lower ratings thanks to high levels of debt. In Ben Bailey's case gearing is 135%, for Oakdene it's 92%. So there does not seem to be any compelling reason to buy Persimmon rather than one of the other house builders.
If a house price crash does ever materialise, a well run house builder should ride it. For the investor, it's just a question of how much to factor that risk into the share price.
More: Property -- Markets and Trends discussion board
