Does the Persimmon (LSE: PSN) share price make the stock a cheap buy? I think it does. I might be biased though, as I own a few shares myself.
But doesn’t a forecast dividend yield of 7.6% suggest I might be right?
The yield wouldn’t be so high if the share price hadn’t fallen, mind. The stock’s down 55% in the past five years.
Bright future?
I could just point to the property price slump, and to high mortgage rates. And those are key factors.
I could suggest that interest rates won’t stay high for ever, and mortgages should start getting cheaper when inflation falls. And I think I’d be right there too.
But we need more than that, if we’re to compare Persimmon’s outlook to its past performance. We need to look at some numbers.
Future sales
Will housebuilders get back to pre-slump build volumes?
I think so, even if it might take a while. I can only see demand getting back to its long-term levels, given the sheer size of the UK’s housing shortage.
But what about revenues?
Well, this year we saw the biggest house price falls since 2009. But in all those other years in between, prices rose. So I don’t think the 2023 dip will last for long.
Profit squeeze
Persimmon’s first-half revenue in 2023 fell by 30%, after completions dipped 36%. That’s compared to last year’s first half.
And we still have the second half to come, which might be tougher. I doubt we’ve seen the full effect of high mortgage rates yet.
I expect revenue will — eventually — get back to its long-term trend. But I think margins and profits could lag behind for quite some time.
In its interim update, Persimmon spoke of “stubborn build cost inflation“. Building materials have skyrocketed in price, and builders just can’t pass the rises through to buyers.
The market dictates
The market dictates house prices, and builders just have to take them. That’s fine when the market is buoyant, but margins are really squeezed now.
Forecasts show Persimmon’s operating margin heavily down this year, and only slowly recovering in the next two years.
For the current year, we’re looking at a forecast price-to-earnings (P/E) ratio of 13, on today’s share price. That’s not obviously cheap.
But by 2025, the City expects earnings rises to push it down to about 9.7. And I’d rate a housebuilder on that kind of valuation as a strong buy.
Further out
Looking further, if earnings can get back even to 75% of 2022 levels, that could send the P/E down under eight.
Do I think it will happen? I’d say there’s a very good chance. When might it be? I have no idea.
My feeling is that the Persimmon share price could stay low and give us more chances to buy cheap for a while yet. The pain from such a horrible financial year could still take a while to shake off.
But Persimmon is still a top long-term buy for me at today’s share price.
