As the Persimmon share price rises, should we buy before it’s too late?

The Persimmon share price is still down in the dumps after collapsing in 2022. But we have a flicker of light, as house prices just rose.

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The Persimmon (LSE: PSN) share price gained 5% in morning trading on 7 November, after the house builder posted a Q3 update.

It comes as we hear that house prices have risen for the first time since March. According to Halifax, October came in 1.1% ahead of September, due to a shortage of properties for sale.

Persimmon shares have a long way to go to recover from their 2022 slump, though. But do we finally see some light?

On track

New home completions in the quarter fell 37% compared to Q3 in 2022. And forward sales declined by 23%.

But that’s what the City expected, so it’s no shock.

Chief executive Dean Finch did point out that “the near term is likely to remain challenging“.

But the overall take I get is that Persimmon is very much focused on the long term. And, as an investor, that’s exactly what I want to see.

Outlook

This year at least looks like it’ll be no worse than feared.

The CEO said: “Trading in the period was in line with expectations and pricing was broadly stable. We are on track to deliver around 9,500 quality new homes in 2023 with operating profit in line with expectations and at an operating margin similar to the first half“.

I don’t really care too much how the short-term outlook looks. But that sounds good enough.

He added that “we continue to position the business for growth when the market recovers“.

What recovery?

So, will the property market recover? I don’t want to be too optimistic on the basis of one upward month. But in the long term, I don’t see how it can’t.

There’s a chronic housing shortage in the UK. And that should surely make the building business a cash cow for the long term.

There are, though, some short-term risks.

The main one, I think, is stock valuation. The Persimmon share price has lost 50% in five years. But, on the back of a years-long property boom, had it risen too high? It might have done.

Correction needed?

Going by broker forecasts, we’re on a price-to-earnings (P/E) ratio of 14. If anything, I think that might be a bit high right now.

It would drop to about 10 by 2025, assuming earnings start to grow again. And these forecasts are always a bit old, as it can take months for them to be updated as things change.

Dividend forecasts vary quite a bit too, from around 5.5% to nearly 7.5%, depending on who we ask. That shows uncertainty, for sure.

Dividend uncertainty

The Q3 update told us nothing new on the dividend front. So all we have right now is the interim dividend of 20p per share.

Persimmon’s focus is on cost control. And if cash runs short, the dividend could be cut.

So, while even 5.5% looks like a good return to me, I can see why folks might be a bit wary.

But all this uncertainty and pessimism says one thing to me. It says I want to buy more Persimmon 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.

Alan Oscroft has positions in Persimmon Plc. 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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