Is It Still Safe To Buy housebuilders Bellway plc, Persimmon plc and Taylor Wimpey plc?

Is it too late to profit from housebuilders Bellway plc (LON:BWY), Persimmon plc (LON:PSN) and Taylor Wimpey plc (LON:TW)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Housebuilding stocks have generated some of the biggest profits for private investors over the last few years.

Consider the gains seen by shareholders in Bellway (LSE: BWY), Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW):

Company 1yr growth 5yr growth
Persimmon 35% 481%
Bellway 49% 388%
Taylor Wimpey 68% 795%

Many investors thought at least some of these companies would fail after the financial crisis, but the opposite has happened.

Helped by sustained government support, the housing market has boomed, as have profits at all the big housebuilders. Investors who have chosen to sit tight and enjoy the ride have done well.

However, I’ve recently spotted some warning signs which suggest to me that investors may need to start paying closer attention to market conditions.

1. Brick volumes down

Shares in brick producer Michelmersh Brick Holdings fell sharply last month. The firm warned that delivery volumes during the second half of the year were “below previous expectations as a result of a softening of the market”.

2. Insulation sales down

Insulation specialist SIG issued a profit warning last week, wiping 24% off the company’s share price in just one day. In the UK, like-for-like sales rose by just 0.4% during the third quarter.

3. New kitchen sales?

Shares in kitchen supplier Howden Joinery Group have fallen by 10% since the firm’s bullish half-year results were published in July. This could simply be a round of profit taking, but may signify that the market believes underlying growth is slowing. We’ll find out more on 5 November, when Howden is due to publish a trading statement.

What does this mean for housebuilders?

Sales growth at companies such as Michelmersh, SIG and Howden should provide a good indicator of how many new homes housebuilders are building. However, we don’t yet know the whole story.

It may be that the big housebuilders are deliberately slowing their growth rates in order to maintain pricing power. Planning delays and shortages of skilled labour could be causing bottlenecks. It’s also possible that SIG and Michelmersh are exceptions, and the wider market is healthy.

We just don’t know.

However, I do think that housebuilding stocks are starting to look quite fully valued:

Company Price/book
ratio
2015 forecast
P/E
2015 forecast
yield
Persimmon 2.8 12.7 5.0%
Bellway 2.0 10.0 3.3%
Taylor Wimpey 2.6 13.4 4.8%

Persimmon

Persimmon’s assets are valued at 2.8 times their book value. The firm will have to generate a lot of profit from its land bank and housing inventory to justify this valuation. I believe Persimmon’s relatively modest forecast P/E of 12.7 is misleading, as profits are heavily cyclical and are much closer to the top of the cycle than the bottom, at the moment.

However, Persimmon’s 5% yield is attractive the firm has net cash. My view is that these shares remain a hold.

Bellway

I’m less keen on Bellway, which has recently moved into net debt to fund land buys. My view is that housebuilders should be funding their operations from free cash flow at this point in the cycle.

Bellway’s yield is also pretty average. In my view this is one of the less attractive housing stocks.

Taylor Wimpey

Like Persimmon, Taylor Wimpey has a very high price/book ratio. The firm’s forecast P/E of 13.4 is also quite demanding.

However, Taylor Wimpey does have net cash. Free cash flow is strong and the shares have an attractive yield. I believe these shares are worth holding.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »