This time last year, I turned bearish on house-builders. In a detailed analysis of one of the FTSE 100‘s giants, Persimmon, I warned readers that despite its ‘undemanding’ earnings rating, the stock was dangerously overvalued. Conversely, I saw good value in ‘expensively-rated’ self-storage specialist Lok’n Store (LSE: LOK) which had just released its annual results.
Persimmon’s shares are down over 20%, and those of fellow blue-chip builders Barratt and Taylor Wimpey (LSE: TW) have lost nearer 25%. Meanwhile, Lok’n Store hasn’t exactly shot the lights out, but its shares had advanced from 370p to 374p prior to the release of its latest results this morning — and they’ve jumped almost 10% higher to 410p, as I’m writing.
After the builders’ big falls, are they now good value? And what of Lok’n Store, after its rise today?
With stocks in cyclical industries — house-builders are some of the most cyclical of all — I believe a value strategy of buying them when they’re cheap and selling them when the value has been outed is the most profitable approach. This rests on my conviction that house-builders will always be prone to boom and bust and that it’s never “different this time.”
I’ve found the asset valuation ratio price-to-tangible book value (PTBV) to be the most reliable indicator of when to buy and sell house-builders. I’d buy when the PTBV is at, or below one, which tends to be around the bottom of the cycle, and sell when the PTBV rises to a level that history suggests is around the top.
For example, when I moved to rating Taylor Wimpey a ‘sell’ last November, the share price was 194p and the PTBV was 2.1. Today, at 154p, the PTBV is 1.5. But to get down to my ‘buy-around’ PTBV level of one, the shares would need to fall to about 100p. As such — and despite Taylor Wimpey’s cheap trailing 12-month earnings multiple of 7.7 — I’m content to avoid the stock at this stage and await developments.
After today’s results for its financial year ended 31 July (and rise in share price), Lok’n Store’s trailing 12-month earnings multiple is a little cheaper than at this time last year. Nevertheless, at 31.4 it’s still way higher than house-builders like Taylor Wimpey.
However, it’s a very different matter when it comes to asset valuation. Lok’n Store today reported a 15.3% increase in adjusted net asset value per share to 480p. The adjustments are for the valuation of leasehold stores and deferred tax and are fair enough, in my view. But I exclude intangible assets, which brings the value down to 468p. Lok’n Store’s PTBV is a highly attractive 0.9.
Looking to the future, management said today: “We have achieved a notable acceleration in our store pipeline to 13 sites which will increase operating space by 32.4% over the coming three years. This will add considerable momentum to sales and earnings growth.”
With the low PTBV, an outlook for robust earnings growth, the company also delivering good cash generation, and having a strong balance sheet, Lok’n Store remains a business I’d be happy to buy a slice of today.