I last wrote about the FTSE 250‘s Bellway (LSE: BWY) a year ago. Since then, much has happened for the national housebuilding business.
For example, the company reduced the shareholder dividend payments. However that move hasn’t stopped the share price from shooting up by just over 50%.
It seems investors have been anticipating a recovery in the housebuilding sector. But the stock’s moved before the ‘facts’ of the fundamentals have appeared in the trading and financial record. That’s often the case with cyclical companies.
The forward-looking stock market
It’s a phenomenon that makes investing in the cyclicals fraught with difficulty. But it proves the stock market and its participants tend to look forward rather than back. To mangle a quote from billionaire investor Warren Buffett: as investors, we need to look through the windscreen rather than at the rear-view mirror.
Last year, I reported on the firm’s full-year results covering the trading year to July 2023. I described the figures in the report as “dire” and the outlook statement was uncertain. City analysts expected further earnings declines ahead.
Today (15 October) Bellway released its full-year report for the trading year to July. Once again, the figures look terrible with just about everything down that we’d want to see up. That includes the promised reduction in earnings per share, which collapsed by almost 59% year on year.
The dividend has been slashed by just over 61%. Meanwhile, what was a healthy net cash position on the balance sheet last year worth £232m has turned into net debt of £10.5m.
That view through the rear-view mirror isn’t attractive. But remember, the stock is up more than 50% while the year has been playing out.
Chief executive Jason Honeyman said Bellway delivered “another resilient performance” despite challenging operating conditions.
A higher order book
The order book was lower at the beginning of the trading year and housing completions were down. But a moderation in mortgage interest rates drove better customer demand and an increase in reservations through the second half, Honeyman said.
Those improving trading conditions and a “strong” outlet opening programme generated an increase in the year-end order book. Because of that, Honeyman reckons the business is well placed to deliver a “material increase” in volume output during the current trading year to July 2025.
So there’s some logic behind the rise in the stock price. It shows that successful investing can be about forming a view and reading the subtle clues in director-speak as much as is about quantitative analysis — in other words, science, art and alchemy!
What next for Bellway? Well, Honeyman thinks the government’s plans to reform the planning system may unlock land supply and support an increase in new housing. If conditions also remain stable, Honeyman reckons Bellway can deliver strong multi-year growth ahead.
The share price is perky today. But near 3,280p, the forward-looking dividend yield is a mere 1.9% or so. However, if trading improves as hoped, the dividend may increase ahead.
Despite the bullish outlook for the business, I can’t quite bring myself to buy at these levels and suspect the fast cyclical gains may already have been won. So I’m watching from the sidelines.
