The Barratt share price slips despite rising profits – time to buy?

Harvey Jones thinks markets have been harsh as the Barratt Developments share price falls in early trading despite a halfway decent update? But will he buy?

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The Barratt Developments (LSE: BDEV) share price has fallen 2.95% after this morning’s trading update, but I think the market has been too downbeat.

The FTSE 100 housebuilder delivered some good news in its update for the year to 30 June, with adjusted profit before tax “slightly ahead of our previous expectations”. Yet investors preferred to focus on the negatives.

There were a few of those, with CEO David Thomas bemoaning “another year of economic and political uncertainty”. Total home completions were at the upper end of the group’s full-year 2024 guidance range at 14,004, but this was still well down on last year’s 17,206. In 2025, they’ll slip to between 13,000 and 13,500, including 600 joint ventures.

FTSE 100 income hope

This can’t have come as a shock to investors, with fellow FTSE 100 housebuilder Taylor Wimpey reporting a sharp drop in completions as higher interest rates drive up costs and deter buyers.

Barratt’s total forward sales also fell, from 8,995 homes in 2023 to 7,239, in line with expectations. Measured by value, that’s a 14% drop from £2.22bn to £1.91bn.

Yet things look like they’re picking up, with the average weekly net private reservation rate up 5.5% to 0.58.

The last decade has been hard on housebuilders generally, thanks to Brexit, the pandemic and cost-of-living crisis. Last year, I loaded up on Taylor Wimpey shares, as I thought the sector would recover as interest rates peaked.

We’re still waiting for that first rate cut but the shares are up 50% in 12 months. Barratt’s trailing significantly with growth of 22%. That’s still pretty good though.

I like to diversify and I’m wondering if Barratt now has an opportunity to play catch-up. It looks good value, with a trailing price-to-earnings (P/E) ratio of 7.03. However, the forward P/E isn’t so attractive, at 20.5 times earnings.

I won’t buy it today

It’s a similar story with the dividend yield. On a trailing basis, the stock appears to offer income of 7%. Yet the forward yield for 2024 is just 3.03%. It’s forecast to climb to 3.9% in 2025, but with Taylor Wimpey yielding more than 6%, I feel like I’ve backed the right horse.

Barratt’s proposed tie-up with FTSE 250 housebuilder Redrow should bring scale and synergies if approved by competition authorities. We should know next month. If it isn’t, the shares could take a hit.

It has a strong balance sheet position with year-end net cash of around £865m. That’s down slightly from last year’s £1.07bn, but as Thomas put it, that “positions us well as land market activity increases”.

The group should benefit from PM Keir Starmer’s plans to “bulldoze through” planning laws to build 1.5m homes in five years. Even if Labour doesn’t hit that target this should generate a lot of activity. There’s a danger that increased property supply could suppress selling prices, but I’m not too concerned given today’s shortages.

With the economy likely to pick up, and analysts forecasting Barratt sales will jump from £4.13bn in 2024 to £4.39bn in 2025,ni think there’s a solid Buy case to consider here. Yet I still favour Taylor Wimpey. It’s cheaper at 15.2 times trailings earnings and yields more.

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.

Harvey Jones has positions in Taylor Wimpey 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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