The Barratt share price is rising: here’s what I’d like to do

Homebuilder stocks are outperforming the broader FTSE 100 index. Royston Roche analyses the Barratt share price after its stellar returns in the past year.

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The Barratt (LSE: BDEV) share price rose about 90% in the past year. It has outperformed the FTSE 100 index, which rose about 35% in the same period.

The expected return to normalcy in the coming months and also the new mortgage scheme are good reasons for investors to look into the homebuilder stock. I would like to analyse the stock to see if the company has the potential to continue the good returns.

Bull case for Barratt share price

The company’s first-half fiscal year 2021 revenue growth was strong. Revenue grew by 10% year-over-year to £2.5bn. It was primarily helped by the completion of 9,077 homes. The full-year 2020 revenue was £3.4bn. The current half yearly results are exceptional taking into consideration the previous full-year revenue and the Covid-19 pandemic. However, I understand that the first half stellar results is no guarantee that it will continue for the rest of the year.

Barratt Development has good profit margins. The successful completion recovery and a strong land bank helped the company deliver an increase in adjusted gross margin to 23.8% from 23% at the end of the same period last year.

The company has a stable balance sheet. Due to the strong cash generation, the company’s net cash position increased to £1.1bn. Land creditors also reduced to £601.1m which further helped the cash position. The board has decided to resume dividend payments with an interim dividend of 7.5p per share. However, there is no guarantee that company will continue to pay future dividends.

The low interest rate environment is good for the real estate sector. The government’s new mortgage scheme, wherein first-time buyers can purchase a house for a 5% deposit, is another positive for the company. The government has also announced a new version of the Help to Buy Equity Loan scheme which might further increase the demand for homes.

Looking into the future, management has given a guidance of home completions between 15,250 and 15,750, plus another 650 joint venture completions for the fiscal year 2021. This is positive when compared to the last year’s figure of 12,604.

Bear case for Barratt share price

The company’s shares have performed well in the past year. Some of the investors could book their profits which could put pressure on the share price. The revenue was down in the fiscal year 2020 and the growth in this year is partly stronger for this reason.

The housing market generally moves in parallel with the economy. If Covid-19 cases rises, growth will stall. This, in turn, might negatively impact the housing market. There is also concern that schemes like help to buy are artificially increasing the demand and house prices. When the government ends the scheme it might lead to a housing bubble. The current form of the scheme is expected to end in 2023.

Conclusion

The company has good fundamentals. The government’s support could further support the home building sector. I believe that the Barratt share price will perform well in the long term. However, I would wait for a better entry point after the strong performance of the company’s shares.

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.

Royston Roche has no position in any of the shares mentioned. 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.

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