Shares in FTSE 100 housebuilder Persimmon (LSE: PSN) were higher this morning following news that CEO Jeff Fairburn would be departing the company given the ongoing controversy surrounding his £75m bonus package.
While some holders may be cheering this development, I’m still not tempted by the stock and its bumper 9.7% yield.
Peaking in value?
Don’t get me wrong — Persimmon’s latest numbers (also released today) are encouraging.
Despite strong comparatives from the previous year, “resilient consumer confidence and continued mortgage lender support” allowed the £7.5bn cap to report a 3% rise in private sales in the period from the beginning of July to 6 November. The York-based business also revealed that it was now “fully sold up for the current year” and had achieved £987m of forward sales beyond 2018 (comparing favourably with the £909m hit by this time in 2017). Today’s update also included details of the company’s intetion to open a new regional operating business in South Yorkshire at the start of 2019 (bringing its total number of businesses to 31) along with indications that it would roll out its own ultrafast broadband service (Fibrenest) for customers purchasing new homes beyond the original 15 sites.
Having fallen 18% in value since early July as fears over a disorderly departure from the EU began to swell, Persimmon’s stock now changes hands for a little under 9 times earnings. That may look inviting but, as investment legend Peter Lynch once remarked, “buying a cyclical after several years of record earnings and when the P/E ratio has hit a low point is a proven method for losing half your money in a short period of time.” Regardless of the market’s positive reaction to the ousting of its CEO, the fact that the company put itself in this situation in the first place by offering such a frankly ludicrous deal to its leader, however competent, is another red flag for me.
Consistently high returns on capital and a solid financial position suggest Persimmon is a quality business but, at the current time, it’s not one I’d want to invest in.
Reasons to be cheerful
Also providing an update today was broadcaster ITV (LSE: ITV). Despite the less-than-stellar reaction from the market, I’d be much more likely to buy its stock over any housebuilder.
Performance in the nine months to the end of September was as expected with total external revenue rising 6% to £2.26bn and growth being witnessed “in all parts of the business“. Revenue from ITV Studios — a part of the company that I think the market is still to fully appreciate — climbed 10% to £1.11bn.
Nevertheless, today’s reaction suggests that investors are still ruminating over the stagnation of advertising revenue. Although up 2% over the nine months to the end of September, growth was negligible in Q3. A predicted 3% fall over Q4 will leave total advertising revenue for the full year broadly flat.
While not insensitive to these concerns, I think there are reasons to be optimistic. “Strong viewing performances” over the trading period, a decent pipeline of programmes going forward, a cost-saving strategy that appears to be working and — importantly — a 43% jump in online advertising revenue in 2018 so far, shouldn’t be overlooked.
Trading at less than 10 times expected earnings and offering a 5.4% dividend yield easily covered by profits, I continue to think that ITV represents great value at the current time.
