Persimmon’s share price has tanked. Is this an investment opportunity?

The Persimmon share price has fallen around 40% over the last year. Is now a great time to buy the builder’s stock? Here’s Edward Sheldon’s take.

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The Persimmon (LSE: PSN) share price has taken a huge hit over the last 12 months. A year ago, shares in the UK housebuilder were trading near 2,300p. Now however, they can be snapped up for less than 1,300p.

Is this a great investment opportunity? Or are Persimmon shares a risky bet from here? Let’s take a look.

Long-term opportunity?

There are few industries that are as cyclical as housebuilding. This is an industry that experiences booms and busts on a fairly regular basis. And, right now, we’re very much in the bust stage.

This was illustrated when Persimmon published its full-year results earlier this month. Not only did the housebuilder advise that the outlook for 2023 was so uncertain that it was unable to provide a profit forecast for the year. It also slashed its dividend by a whopping 75%. It seems higher interest rates, economic uncertainty, and soaring costs have really hit the UK housing market hard.

Now for those with a long-term investment horizon, there could potentially be an opportunity here. At some stage, conditions in the housing market are likely to improve. It’s worth pointing out that Persimmon believes the fundamentals underpinning demand for new homes remain “strong”.

However, I’m not expecting a ‘V-shaped’ recovery in the share price here. I think a way back could be slow and drawn out.

A slow rebuild

We can expect 2023 to be a challenging year for the UK housebuilders. In Persimmon’s recent full-year results, it said that its current forward sales position was £1.52bn, down from £2.21bn a year earlier. That represents a decline of more than 30%. So sales are likely to fall significantly this year.

The sales rates seen over the last five months mean completions will be down markedly this year and as a consequence, so will margin and profits.

Persimmon CEO Dean Finch

Worryingly, City analysts don’t expect the company to return to its level of pre-pandemic sales for at least the next four years, according to Refinitiv forecasts.

In previous industry slowdowns, the government has often come to the rescue with schemes such as Help to Buy (which helped first-time buyers with mortgages). However, there doesn’t appear to be any such support this time around. Instead, the government has actually introduced a new 4% tax on housebuilder profits in an effort to generate income to remedy unsafe cladding. This is not ideal.

Adding further uncertainty here is a recent probe into the sector by the UK’s Competition and Markets Authority (CMA). It’s concerned that housebuilders are not delivering the homes people need at sufficient scale or speed. The regulator has said that if it finds competition or consumer protection concerns it is prepared to take the necessary steps to address them.

So overall, the outlook for Persimmon (and the other UK housebuilders) appears to be quite bleak in the medium term. It’s worth pointing out that analysts at Peel Hunt just downgraded Persimmon shares from ‘hold’ to ‘reduce’ on the back of the outlook.

My view

Given the high level of uncertainty here, my view is that Persimmon shares are best avoided right now. They may rebound at some stage. However, all things considered, I think there are much better (and safer) stocks for investors to buy today.

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.

Edward Sheldon 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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