At £11.60, are Persimmon shares a steal? Here’s what the charts say!

Persimmon shares lifted this week after the firm posted a sharp drop in H1 profit. Dr James Fox takes a closer look at the FTSE 100 builder.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young female business analyst looking at a graph chart while working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In its Thursday update, Persimmon (LSE:PSN) announced its confidence in aligning with projected full-year profit expectations. This is despite challenges like elevated mortgage rates, the cessation of the Help-to-Buy program, and considerable market volatility.

During the half-year assessment, the homebuilder highlighted substantial resilience in its top-line growth, excluding bulk sales. It referred to its growth as “robust“. This was reinforced by the improvement in private average selling prices, which was complemented by effective cost-saving measures.

With this, the share price ticked upwards slightly. The stock is now trading at £11.60, down 37% year on year. So, with this broadly positive outlook, is this a buying opportunity?

Valuation

UK housebuilders currently trade at remarkably low multiples. This is a consequence of the exceptional performance during the 2021/22 period, which witnessed a substantial surge in house prices across the nation. This surge led to improved volumes and margins within the sector.

Yet, spanning the past 18 months, the industry has faced headwinds in the form of inflation and monetary tightening. This has led to a noticeable deceleration and subsequent decline in share prices.

Persimmon shares trade at around 4.5 times earnings on an adjusted basis, and 6.7 times on statutory. This reflects a discount versus industry peers, including Vistry, Barratt Development, and Redrow.

Created at TradingView

However, on the price-to-sales ratio, Persimmon appears more expensive. This suggests that Persimmon is more efficient at generating profits from revenue. In turn, we can observe that Persimmon may be achieving better margins than its peers.

Persimmon has traditionally been known to trade at a premium compared to some of its peers in the UK housebuilding industry due to its higher profit margins.

One of the factors contributing to Persimmon’s historically higher valuation is its business model, particularly its approach to land sales.

The FTSE 100 stock has been known for strategically managing its land bank and optimising land sales, which has positively impacted its profit margins and overall financial performance.

Created at TradingView

Considerations

As emphasised by CEO Dean Finch on Thursday morning, the long-term demand for housing is likely robust. This need has become increasingly apparent over time, as the pace of housing supply struggles to match the consistently growing demand.

Various factors contribute to this upward trajectory in demand, including notable increases in life expectancy rates and a marked rise in the number of single-person households. The result is a distinctly pronounced scarcity in housing availability.

It’s simple, but positive appraisal on the outlook moving forward. Despite the current unfavourable backdrop for home buyers, and the impact of cost inflation on homebuilders, it seems likely that the industry will experience a significant uptick in time.

This makes Persimmon, a company well-positioned to deal with economic challenges, partially by virtue of its size, an attractive long-term investment. The stock, however, may not see upward pressure for some time. When considering the monetary value of time, some investors may see better prospects elsewhere.

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.

James Fox has positions in Vistry Group Plc. The Motley Fool UK has recommended Redrow Plc. 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.

More on Investing Articles

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

3 essential factors for investors to consider when aiming for passive income success

Mark Hartley outlines three of the most important considerations investors are faced with when attempting to secure a lucrative passive…

Read more »

Investing Articles

£10,000 invested in Barclays shares 1 month ago is now worth…

Barclays shares have carried on where they left off in 2024, by climbing far faster than the FTSE 100. Harvey…

Read more »

Investing Articles

I’ve been watching the easyJet share price like a hawk. Here’s what it did last week

Harvey Jones can't take his eyes off the easyJet share price. He thinks it looks good value and ready to…

Read more »

Investing Articles

A £10,000 investment in Nvidia stock 6 months ago is now worth…

Nvidia stock's shown a lot of volatility for a mega-cap company in recent weeks. Dr James Fox explores how an…

Read more »

Investing Articles

4 reasons Ferrari could continue to be a stock market winner

The global luxury goods market may have struggled in recent years, but you wouldn’t guess that from Ferrari’s soaring stock.

Read more »

Investing Articles

5 perfect starter stocks to consider for a Stocks and Shares ISA in 2025

Wondering which shares to buy for a newly opened Stocks and Shares ISA? Our writer thinks these five investments are…

Read more »

Row of terrace houses.
Investing Articles

Thinking about buy-to-let? Consider these UK stocks instead

Owning UK property stocks could be a better way to invest in buy-to-let, though there are drawbacks. Royston Wild explains.

Read more »

Investing Articles

Here’s a plan to target £7,500 a month in passive income

This writer outlines a roadmap that someone could consider taking to try and aim for a substantial future passive income…

Read more »