Berkeley's shares are rarely priced to go, but that's the cost of quality.
The older I get, the more I appreciate Charlie Munger's famous steer to Warren Buffett to buy great companies at reasonable prices rather than trying to grab middling companies for a song.
If you can buy and hold one of those rare firms that combines managerial excellence, a clear strategy, financial success, and a strong balance sheet, then you can enjoy excellent progress over the years without having to periodically read the financial statements through the cracks in your fingers.
There's also the intangible advantage of being proud of the company you part own.
The pleasant sort of profit warning
Take the Berkeley Group (LSE: BKG). Today the premium property developer said full-year results to the end of April will be at the higher end of analysts' estimates.
In fact, it's already got sufficient sales in the bag!
Underlying transaction levels remain approximately 40% below historical average levels, but Berkeley cut costs well ahead of the slump. Sales prices have stabilised -- albeit presumably at the lower price level Berkeley previously flagged up (as a result of shifting its mix to safer prospects in the recession). Cancellation rates are normal.
A slight disappointment is that Berkeley seemingly isn't snapping up cheap land as extensively as its legendary Chairman Tony Pidgley hoped it would when the company raised £50 million in March 2009 for that purpose.
Berkeley raised almost as much back in the early 1990s, and having spare cash in that housing market crash served it well in the years that followed.
This time, Pidgley just doesn't seem to be seeing the same bargains. As of December, Berkeley had added 1,800 plots across 12 sites to the 30,000 odd in its landbank. It has secured just four more sites since then.
Cashing up
Perhaps Pidgley's reputation as property bargain hunter is now so strong that anyone selling to him knows they're on the wrong side of the trade? If so, truly distressed markets would suit him best, and by his own admission such conditions didn't last long this time.
Still, shareholders can take comfort that Pidgley isn't just doing deals for the sake of it -- and that the slower rate of land purchasing means Berkeley's cash reserves have piled up.
The developer started its financial year with £285 million of net cash, which rose to £345 million by 31 October 2009. It said today its final cash position for the year will lie within this range, depending on what opportunities it sniffs out before 30 April.
Life after a legend
Pidgley is a patient man as well as a skilled operator, and he has long-term vision, too. Seeing how the wind was blowing back in 2004, he shifted Berkeley out of volume housebuilding and into more specialised urban regeneration projects. The company now regularly wins awards for its projects, including a Queen's Award for Enterprise in 2008.
It's true this shift means Berkeley has benefited more than most from the sudden resurgence in the high-end London housing market, and also from the weak pound, which has made Berkeley's classy apartments attractive to overseas investors. If it was building rabbit hutches in Macclesfield things would be different -- you'll have to decide yourself whether it was Pidgley's mastery of the cycle or pure luck that put Berkeley in the right place at the right time, but I know what I think.
Another example of Pidgley's vision is that he's already begun a five-year training plan to ensure the company's 44-year old managing director Rob Perrins can fill his shoes when he finally shuffles off-site, if not off this mortal coil (he's 61). Compare that to the farcical lack of succession planning at companies like Marks & Spencer (LSE: MKS).
Pidgley will be a hard act to follow, but Perrins (who has worked at Berkeley for over 15 years) will have had every opportunity to learn from his mentor.
Quality streets
Having gushed sufficiently about this great company, we come to the thorny issue of what's a 'reasonable price' to pay.
The shares are 823p. According to Hemscott, the 'higher end of analyst's expectations' is the 58.9p earnings per share forecast from Collins Stewart. The consensus is for just over 53p.
Let's split the difference and look for earnings per share of 56p, which puts Berkeley on a P/E of just under 15. The yield is less than 1%.
Hardly bargain basement. But reasonable? Maybe.
Compare Berkeley's performance with Barratt (LSE: BDEV) and Taylor Wimpey (LSE: TW), which saw their share prices fall by over 90% as they endured spectacular writedowns in the housing slump. Such turmoil saw Barratt swing from a £425 million profit in 2007 to a loss of some £600 million last year, and neither it nor Taylor Wimpey will return to profit this year, making P/E comparisons impossible.
In contrast, Berkeley hasn't written down the value of its landbank at all. Profits have fallen from £194 million at the peak, but it will still make over £100 million this year. Plus there's 200p or more per share of cash in the bank.
Over ten years Berkley's shares are up 65%, while Barratt's are down 34% and Taylor Wimpey's have fallen over 70%, despite their strong recovery in the dash-to-trash rally of 2009 -- and Barratt's share price growth previously trouncing Berkeley's at the top of the cycle. Berkeley's pragmatism and unwavering belief that the property market is cyclical, however good things seem, has served its long-term investors well.
When Berkeley did that 1993 rights issue, the shares were offered at 295p. Some 15 years later they'd reached just shy of £20. The Barratts of the housebuilding world may boom and bust again, but if Rob Perrins can do what Pidgley has done for decades, I'm pretty confident anyone buying Berkeley at 823p will be sitting pretty after the next 15 years, too.
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