Key points
- Between 2017 and 2021, revenue increased from £3.9bn to £4.2bn
- Cost inflation may eat into future profit margins
- With lower P/E ratios than two major competitors, the company may be undervalued
With higher demand during the Covid-19 pandemic, residential construction firms have enjoyed improved results of late. One such company is Taylor Wimpey (LSE:TW), which builds a wide variety of properties, from single-room apartments to six-bedroom houses. Looking at the company’s price-to-earnings (P/E) ratios also makes me think the current share price is cheap. It is currently trading at 144.5p, down 21% in the past year. Let’s take a closer look at why I’m adding this firm to my long-term portfolio today.
Recent and historical results
Between the 2017 and 2021 calendar years, the company’s revenue increased from £3.9bn to £4.2bn. Despite this, pre-tax profit fell slightly from £682m to £679m. Accordingly, earnings per share (EPS) fell to 18p from 20.2p.
Over this five-year period, these results seem rather lukewarm to me as a potential investor.
Compared to the 2020 calendar year results, however, the most recent results are a massive improvement. The 2021 revenue figure was up 53.6% year on year. Additionally, pre-tax profits grew 157% over the same period. This trend moved the management to reiterate its growth targets for the 2022 calendar year on 3 March 2022. It is important to note, however, that past performance is not necessarily an indicator of future performance.
As a potential shareholder, I’m also looking closely at cost inflation, which could impact wages and materials. If this continues to rise, it may eat into the firm’s profit margins and negatively influence the Taylor Wimpey share price in future. The increased cost of borrowing may also be off-putting for those looking to purchase new homes.
Is the Taylor Wimpey share price cheap?
One way to find out if a company is over- or undervalued is by looking at its P/E ratios. The trailing P/E ratio is found by dividing the share price by earnings and the forward P/E ratio is calculated by dividing the share price by forecast earnings.
At the time of writing, Taylor Wimpey has a trailing P/E ratio of 8.84 and a forward P/E ratio of 7.13. In isolation, these numbers don’t tell me all that much. When compared with major competitors, however, I can determine if the firm is cheap or not.
Competitor Persimmon has trailing and forward P/E ratios of 8.84 and 8.31 respectively. This implies that Taylor Wimpey is only slightly better value than Persimmon.
The Berkeley Group, another business in the construction sector, has trailing and forward ratios of 9.92 and 9.75. What this tells me is that is that the Taylor Wimpey share price is only slightly undervalued, but that I would be getting a bargain if I bought shares today.
Overall, this company’s growth is consistent. It is currently benefiting from favourable conditions in the housing market. While there are of course risks, specifically cost inflation and the increased cost of borrowing, I will be buying shares today owing to the strong possibility that the firm is undervalued.
