Housebuilders are in a sweet spot and their shares will continue to outperform the market in 2015, the bulls argue. I am not so sure.
However, if the bulls are right, should you add Taylor Wimpey (LSE: TW) to your portfolio? Or should you choose one among Berkeley (LSE: BKG), Persimmon (LSE: PSN) and Barratt (LSE: BDEV)?
Taylor Wimpey: Cheap Enough?
Taylor Wimpey stock is up 20% in 2014, but still trades some 10% below the average price target from brokers, which has risen by 20% since December 2013. The shares are trading around their five-year highs.
This is one of the cheapest stock in the peer group, based on earnings and cash flow multiples, so Taylor Wimpey could be a bet worth taking in 2015. Its dividend yield will likely come in above 7% in the next couple of years, while its dividend cover ratio stands at 1.5x, with a free cash flow yield north of 7%.
Taylor Wimpey’s pipeline is healthy and its needs are almost fully covered, given that the builder has secured land for 2015 and 2016. Operating profitability could be higher than 20% over the medium term, which is one element I like. This may turned out to be the most obvious investment in the sector, but management must maintain financial discipline in order to deliver shareholder value.
Barratt’s On A Roll
Barratt stock is up almost 30% in 2014. The average price target from brokers has risen by roughly the same amount in the last 12 months. So, what lies ahead for shareholders?
Based on trading multiples and fundamentals, Barratt shares may offer more upside in 2015, although its free cash flow yield is less appealing than that of rivals at the moment. However, Barrett is expected to continue to grow revenues above UK inflation, while its operating profit margin is expected to rise over time, which should boost Barratt’s cash flow and payout profile.
Its aggressive capital structure could help it boost shareholders’ returns into 2018. Moreover, the stock’s price to earnings ratio stands at 10x and 9x for 2015 and 2016, respectively, so the shares are not particularly expensive.
Berkeley/Persimmon: The Laggards?
Berkeley stock is in negative territory (-5%) for 2014. This is a bet on London and the South East, where growth prospects have now become less enticing, the bears argue. To a certain degree, there’s merit in that view.
On the one hand, the shares of players boasting a more diverse geographical mix, such as Barratt, could offer more upside. On the other hand, Berkeley stock looks a bit overvalued based on trading multiples.
My best guess?
Berkeley shares will likely underperform those of rivals by at about 10% in 2015.
Finally, Persimmon shares have risen by 25% in 2014. They are rather expensive right now and trade at a premium of 10% against those of competitors. The average price target from brokers is in line with Persimmon’s current stock price, which is not a warning sign, in my view, because Persimmon offers better returns than the sector — but whether its stock will continue to rally, that is another matter.
