The FTSE 100 managed to advance almost 2% last month. And that’s despite the Persimmon (LSE:PSN) share price going down 14%.
November was a bad month for shares in house building companies. But that doesn’t even begin to explain why Persimmon lost over a fifth of its market value.
Reports
Earnings reports can often be a major catalyst for share price changes. And so it proved with Persimmon, with the company’s latest update going across quite badly with investors.
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Things weren’t all bad by any means – demand looks strong and orders were up 17%. On top of this, UK mortgage approvals have just hit their highest levels in two years.
That’s a good thing, but it probably doesn’t matter much if Persimmon isn’t able to make any money from it. And that’s the issue the company identified.
The firm indicated it expects higher costs in 2025 from a mix of inflation, new building regulations, and the Budget. That’s why investors sent the stock down 8% in response.
Competition
Arguably, the last thing any firm needs after warning about future costs is another company immediately offering a more positive outlook. But that’s exactly what happened to Persimmon.
The day after Persimmon’s report, fellow FTSE 100 builder Taylor Wimpey offered its own update. And it gave no indication of higher costs weighing on profits either this year or next.
There are a couple of ways of viewing this, but neither is good for Persimmon. One is that its cost challenges are specific to the business, rather than the wider industry.
The other is that Taylor Wimpey investors are in for a surprise. That might be bad for them – and we’ll see next year – but it’s no help for Persimmon’s shareholders
Buy the dip?
I’m not going to keep anyone in suspense here – I’m not buying shares in either Persimmon or Taylor Wimpey. They look cheap and have attractive dividend yields, but I’m staying away.
One of the key lessons of 2024 is not to discount regulatory risks. Investors in Lloyds Banking Group knew about the car loans investigation since January, but ignoring it has proved unwise.
The Competition and Markets Authority (CMA) is looking into a number of builders at the moment, including Persimmon and Taylor Wimpey. The potential issue is collusion.
What they might find I don’t know. But following Lloyds shares this year (I’m not an owner) is enough to make me think the risk just isn’t worth it.
Patience
Once the CMA investigation concludes, I’d certainly be willing to take another look at the house building industry. And the last month has been interesting from that perspective.
Aside from that big unknown, I think there’s a lot to like about the UK builders. So I’ll be watching closely over the next year or so for new developments.
I’ve historically tended to think of Persimmon as a riskier bet than some of its peers for a few reasons. And while I’m open to changing that view, the last month has mostly reinforced it.
