How Foxtons Group plc can rise 50% by 2019 despite 54% fall in profit

Foxtons Group plc (LON: FOXT) could be a surprisingly strong performer over the next two years.

| 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.

Wednesday’s full-year results from Foxtons (LSE: FOXT) show that the London property market endured an exceptionally difficult year in 2016. The estate agent recorded a 54% fall in profit and stated that 2017 is likely to be yet another uncertain year. Despite this, the company’s medium-term outlook suggests its shares could rise. And if the London property market stabilises and picks up in the next two years, the company’s shares could be trading as much as 50% higher.

A difficult year

Last year was a hugely challenging one for Foxtons. The EU referendum caused a high degree of uncertainty in the London property market. Alongside this, rises in stamp duty also meant that demand for property declined. This led to a reduction in the company’s sales revenue of 23% during the year, with there being deterioration throughout the year. While the company’s lettings business was relatively robust, even its revenue was 1% lower than in the prior year.

As a result of falling profitability, Foxtons has slashed its full-year dividend from 5.01p per share to 2p per share. It will also not pay a special dividend for 2016. While disappointing for income investors, this seems to be a sensible strategy given the difficult outlook which is expected to be faced in 2017. Despite this, the business was able to open seven branches in 2016 and two branches in February 2017. This demonstrates the degree of confidence it has in its long-term future.

Growth potential

Even though Foxtons faces a tough 2017, its performance in 2018 is forecast to improve significantly. Its bottom line is expected to decline by 5% this year, but then rise by 21% in 2018. Despite this high growth potential, it trades on a price-to-earnings growth (PEG) ratio of just 0.9. This suggests that its shares could rise by 50% and still offer fair value for money and a wide margin of safety. If they were to do so, Foxtons would trade on a PEG ratio of 1.3. This may be closer to its intrinsic value.

Certainly, an improvement in the outlook for London property transactions will be required in order for Foxtons to deliver high capital gains. However, with sterling remaining weak and the UK’s economic performance being robust as discussed in Wednesday’s budget, it would be unsurprising for investor appetite towards London property to improve.

A better option?

One of the company’s sector peers, Purplebricks (LSE: PURP), may offer even higher returns over the next two years. It has been successful because it offers a significantly lower cost to property-sellers, while providing much of the same level of service of traditional estate agents. Therefore, its financial performance is expected to improve at a rapid rate.

For example, Purplebricks is forecast to move into profit next year and follow it up with earnings growth of 175% in the following year. This puts it on a PEG ratio of just 0.2, which indicates that its share price growth potential is higher than Foxtons. As such, it seems to be the better buy in what is a potentially highly profitable sector.

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.

Peter Stephens 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

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 »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »