Persimmon’s (LSE: PSN) share price has fallen 19% from its 16 October one-year high of £17.21.
This does not necessarily mean that it is a bargain though. It could be that the underlying business is just worth less than it was before.
However, it might be that the market has failed to fully factor into the share price the true value of the business.
I took a deep dive into Persimmon’s business and its share price to find out which is the case here.
How does the underlying business look?
For a long time, UK housebuilders faced powerful headwinds that made progress difficult.
The pandemic crippled demand and then interest rates spiralling to 16-year highs kept it low. The resultant rise in the cost of living further stymied any significant rise in home buyer numbers.
That said, the sector backdrop has improved, with cuts in interest rates from last year.
Also positive was the new Labour government’s commitment to build 1.5m new homes over its five-year term. And last week (11 June), Chancellor Rachel Reeves announced another £10bn investment to build thousands more homes in England.
Persimmon’s 11 March full-year 2024 results saw new home completions rise 7% year on year to 10,664. The average selling price for these increased 5% to £268,499, with new housing revenue up 13% to £2.86bn.
These numbers fed through into a 14% rise in underlying operating profit to £405.2m.
Overall, its revenue jumped 16% to £3.2bn, while its profit before tax increased 2% to £359.1m.
In its 1 May trading update, the firm reiterated its forecast of 11,000-11,500 new homes completions this year.
However, it cautioned that this is based on the UK housing market remaining stable. I think the chief risk to its stability is another major surge in the cost of living.
How does the share price compare to fair value?
My key method in calculating any stock’s fair value is to run a discounted cash flow (DCF) analysis. This establishes where a firm’s share price should be, derived from cash flow forecasts for its underlying business.
The DCF for Persimmon shows its shares are 54% undervalued at their current £13.86 price.
Therefore, the fair value for the stock is £30.13, although there is no guarantee it will reach that price.
But this looks well supported to me by analysts’ forecasts that its earnings will grow a very healthy 14.2% a year to end-2027.
It finds further resonance in the firm’s low benchmark measurements against its competitors.
More specifically, its 16.5 price-to-earnings ratio is bottom of its peer group, which averages 31.9. These firms comprise Taylor Wimpey at 19.6, Bellway at 23.3, Vistry at 28.6, and Barratt Redrow at 56.2.
Will I buy the stock?
I focus on stocks with a dividend yield above 7%. Persimmon’s payout is 4.3%, which is higher than the 3.5% FTSE 100 average, but it is still not for me.
That said, for investors without such a focus, it may well be worth considering.
I believe its strong earnings growth should drive the share price (and the dividend) higher over time.
