If I’d invested £1,000 in Persimmon shares 2 years ago, here’s what I’d have today

Dr James Fox takes a closer look at Persimmon shares after the housebuilder reported Q3 earnings and kept its guidance for the year.

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Persimmon (LSE:PSN) shares are down 18.6% over 12 months and 60.1% over two years. The housebuilder stock has even fallen out of the FTSE 100. So, if I had invested £1,000 in the housebuilder two years ago, today I’d have £399 plus dividends.

Investing two years ago today (7 November), I’d have missed that last of the big dividend payments. Instead, I’d have received around £60 in dividends over that two years. My total returns, therefore, would represent a considerable loss.

But what about now? Is this a good time to consider investing in this beaten-down builder?

It’s not alone

Persimmon is by no means the only struggling housebuilder. Higher interest rates have increased the cost of borrowing and have led many people to delay their house purchases until rates fall.

Moreover, from an affordability perspective, we can also note the profound impact that the conclusion of the help-to-buy scheme has had on demand.

This has exacerbated challenges linked to increasing build costs as inflation soared following the pandemic. Collectively, these factors have put pressure on margins.

Persimmon was also impacted heavily by the fire safety pledge — the cost of recladding homes deemed unsafe after the Grenfell disaster.

In early 2022, the firm said recladding operations would cost £75m. However, a few months later it raised its estimate to £350m — approximately 40% of pre-tax profits in 2021/22. 

Q3 earnings

The big questions is whether things are starting to pick up. Persimmon said today that it was trading in line with expectations and maintained its guidance for the year ahead.

The homebuilder noted significant declines in completed projects, underlying operating profits, and overall profit year on year. This was due to the aforementioned factors.

However, the results were reassuring. The FTSE 250 company revised its expectations for 2023 and now anticipates constructing 9,500 homes, surpassing its previous projection of 9,000 units from August.

This improved outlook is attributed to better sales performance since the beginning of October. Meanwhile, the company noted a small drop off in pricing, no distress in cancellations, and an uptick in private sales versus a year ago.

Worth the risk?

The UK housing market clearly isn’t out of the woods, but it’s certainly possible that the market has bottomed out.

Analysts are now expecting earnings per share (EPS) to come in around 76p in 2023, for a forward price-to-earnings ratio of 14.2 times.

Compared to the blue-chip index, that’s not cheap. In fact, it’s broadly in line with the index average. That’s unusual as cyclical stocks like housebuilders tend to trade at a discount to the average.

Moving forward again, consensus suggests that earnings will pick up in the medium term. In 2024, analysts expect EPS to come in at 90.4p. In 2025, the figure is 109.9p.

This sustained earnings growth forecast explains why we’re looking at a higher forward P/E.

If interest rates stay higher for longer, and the forecast recession is deeper than anticipated, the sector could face more challenges.

However, I see this as an attractive sector, and Persimmon is among the companies I’m considering.

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 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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