Is Foxtons Group plc uninvestable after today’s fall?

Are signs of value emerging at Foxtons Group plc (LON:FOXT)? Roland Head takes a look at the latest figures.

| 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.

The divide between house-builders and estate agents continues to grow wider. While most house-builders are still reporting sales growth and strong demand, estate agents are not.

Shares of London chain Foxtons Group (LSE: FOXT) fell by 5% this morning, after the group said that adjusted EBITDA fell by 45% to £25m last year. The group’s founder and chief executive, Nic Budden, warned investors that 2017 is likely to be a “challenging” year.

The group’s main problem is that residential property sales in London have collapsed. Revenue from sales was £12m during the final quarter of last year, down from £20m in the fourth quarter of 2015.

The group’s lettings business has taken some of the strain, and now accounts for about half of its revenues. But growth has been limited during the second half, and lettings revenue was flat in Q4.

Value buy or value trap?

Foxtons shares have been popular for their cash generation and high yield. But earnings have fallen steadily from a peak of 30p per share in 2012, to a forecast level of 6.4p per share for 2016.

Analysts’ forecasts currently suggest that Foxtons’ earnings will rise by 12% to 7.2p per share in 2017. On this basis, it could make sense to buy at current levels.

The risk is that weaker market conditions will last longer than expected. Although Foxtons’ debt-free balance sheet and lettings business mean that there’s no danger of the group running into financial difficulties, it may be forced to downsize if property sales continue to slump.

Foxtons is beginning to show signs of value, but I plan to wait until the group’s 2016 accounts are published in March before making a decision.

Is this the safest property stock?

One company whose profits seem unaffected by the slowing London market is the dominant online property website, Rightmove (LSE: RMV). The group’s website has become indispensable for most estate agents, as almost all sellers insist on a Rightmove listing. This has given the firm an apparently unassailable lead over its competitors.

As a consequence, Rightmove has been able to develop extremely high profit margins. During the first half of the year, the group’s operating margin was 74.6%. One reason for this is that the company keeps finding new ways to extract money from estate agents. Last year’s interim results show that the average revenue per advertiser during the period was £830 per month, £90 more than during the first half of 2015.

For investors, Rightmove poses two questions. Are the group’s profits sustainable, and are the shares too expensive?

In my view, the profits probably are sustainable. Although the firm may see some weakness in the event of a housing crash, its competitive advantage would remain. Profits would eventually recover. Even if online agents such as Purplebricks become dominant, I believe there’s still likely to be demand for a central portal where buyers can view all agents’ stock in one place.

I’m less convinced about Rightmove’s valuation. The group’s shares trade on a 2017 forecast P/E of 26. That seems expensive to me, given that earnings per share are only expected to rise by 12% this year. A dividend yield of 1.2% isn’t really enough to compensate, so for me, these shares are just too expensive to be of interest.

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 recommended Rightmove. 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »