Has the Persimmon share price bottomed out?

After 18 months of declines, the Persimmon share price is rising. But should investors worry about lower revenues due to declining sales volumes?

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After 18 months or so of steady declines that saw it kicked out of the FTSE 100, the Persimmon (LSE:PSN) share price is up 12% since the start of this week. The main catalyst seems to be the housebuilder’s latest trading update. 

Along with reports of stablising house prices, management increased its guidance for the number of houses to be delivered this year. So is this a sign that the stock is ready to rally?

The good

To my mind, Persimmon’s latest update was something of a mixed bag. There were positives, for sure, but also some significant issues. 

The main positive news concerned pricing. On average, Persimmon’s selling price over the last three months was 2% higher than during the same period a year ago. 

This is particularly impressive given the decline in property prices over the last few months. Furthermore, it looks like the decline in the housing market is coming to an end – at least for the time being.

According to the latest data, asking prices and selling prices are starting to move higher again, for the first time in six months. So there’s reason to believe that Persimmon is going to be able to maintain its prices for the foreseeable future.

The bad

The bad news mostly concerned volumes. The reason prices have remained stable is due to a reduction in supply, rather than strengthening demand.

In other words, fewer houses are being built. This is true of Persimmon, whose output is 37% lower than last year, as well as the wider sector where the latest Office for National Statistics data indicates construction output has been declining steadily. 

Further evidence of weak demand came from the average number of weekly sales per outlet. This came in at 0.46, compared to 0.61 a year ago. 

When prices are resilient but volumes are lower, this usually results in weak revenues but strong margins. And that’s mostly what investors have been seeing in the latest Persimmon report. 

Time to buy the shares?

The market has taken Persimmon’s update very well, with shares moving higher this week. But I’d be cautious about buying the stock at today’s prices. 

To my mind, it looks like the UK is on the brink of a recession. Ultimately, I think housebuilders in general – and Persimmon in particular – are going to have to do more than maintain their margins in order to be good investments. I suspect demand in the property market has further to fall. 

The Bank of England’s decision to stop raising interest rates (at least for the time being) is certainly a positive for the company. 

But unless the UK can get back to positive GDP growth, I think Persimmon’s earnings will stay suppressed for some time.

I’m therefore not convinced the share price has reached its lows. I hope I’m wrong – I’d like to see the company’s shareholders do well – but the stock looks like too much of a risk for me in the current environment.

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.

Stephen Wright 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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