The prospects for the UK economy may be uncertain at the present time. Brexit talks are ongoing and there’s significant debate about various issues including the Irish border and the customs union. As such, it wouldn’t be surprising for confidence in the UK economy to come under a degree of pressure.
However, one sector which appears to have a positive outlook is housebuilding. Government support alongside lower interest rates could keep demand levels healthy, while supply continues to be exceptionally low. As such, these two housebuilders could be worth buying now for the long run.
Reporting on Thursday was Bovis (LSE: BVS). The company has experienced a hugely challenging few years, with customer redress hurting its financial performance. However, it now has a new management team in place and they seem to be delivering improved performance.
Certainly, its revenue and profitability declined in 2017 versus the prior year. However, a reduced number of completions was a key cause of this, with Bovis deciding to focus on customer satisfaction rather than just profitability. This strategy seems to be working, with the stock now on track to recover a 4-star HBF rating.
Looking ahead, Bovis is expected to report a rise in its bottom line of 35% in the current year, followed by further growth of 16% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.6, which suggests that the stock remains cheap at its current price level. And while its recovery may not yet be complete, it appears to be on the right track. This could lead to share price growth in the long run.
Also set to capitalise on the housing market’s growth potential is fellow housebuilder Persimmon (LSE: PSN). It has been able to generate strong earnings growth in recent years. In fact, in the last five years its bottom line has risen at a double-digit rate in every year.
This is a stunning rate of growth and yet the stock has a price-to-earnings (P/E) ratio which is little more than 9. This suggests that investors remain unsure about the prospects for the UK housing market. However, with interest rates set to rise at a relatively slow pace and the government continuing to participate in its stimulus programmes, the prospects for the industry appear to be positive, even when Brexit risks are factored in.
Furthermore, it appears as though investors have taken into account a potential slowing in the housing market. Persimmon’s valuation includes what appears to be a wide margin of safety, and this could provide new investors with an enticing risk/reward ratio.
During the last two decades the outlook for the housing market has been consistently uncertain. Affordability issues and economic woes have caused investors to remain cautious. But with demand and supply being so far out of alignment, the future for the industry may be similar to its fast-growing past.
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Peter Stephens owns shares in Persimmon. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.