The FTSE 100’s Barratt Redrow (LSE: BTRW) is down 33% from its 20 August 12-month traded high of £5.63. This puts Britain’s largest homebuilder close to the £3.62 level it hit on 15 July – a price not seen since October 2022.
Such a slide could mean that the fundamental business is worth less than it was before. But it could mean there is a huge bargain to be had.
I looked closer at the business and ran the key numbers to determine which one it is.
Timing is everything
The catalyst for the 15 July three-year price low was the firm’s fiscal year 2025 trading update. This showed that home completions were 16,565 compared to the 16,800-17,200 range it had forecast.
As a former senior investment bank trader, a notable negative price reaction to such an undershooting is expected. But as a private investor since then, it looks like an opportunity for investors whose portfolio it suits.
This is because I regard the standard investment cycle in my current role as 30 years or more. In my previous job it could well have been 30 seconds or less.
Looking to the longer-term health of the firm, the rest of the results looked perfectly good to me.
Its reported forward sales during the year soared 53% year on year to £2.9216bn from £1.9123bn. It expects its final underlying pre-tax profits to be in line with market forecasts of approximately £583m. And it projects home completions in this fiscal year 2026 to be 17,200-17,800.
A risk here is that fears of another surge in the cost of living keeps potential buyers sidelined.
However, analysts forecast Barratt Redrow’s earnings will increase by a whopping 27.5% each year to end-fiscal year 2028.
How undervalued are the shares?
Discounted cash flow (DCF) analysis show where any firm’s stock price should trade, based on cash flow forecasts for the underlying business.
For Barratt Redrow the DCF shows its shares are undervalued by 73% at their current £3.79 price.
Their fair value is £14.04. This adds back the amount the shares fell since 15 July and includes the substantial earnings growth expected. But they may never reach that value, of course.
Yet secondary confirmation (relative to its competitors’ shares) of its undervaluation is also evident.
The 0.6 price-to-book ratio is the joint lowest of its peer group, which averages 0.9. They include Vistry at 0.6, Taylor Wimpey at 0.9, Berkeley Group at 1, and Persimmon at 1.1.
Positive for the stock too is a £100m share buyback announced in the trading update. These tend to support share price gains over time.
The bonus of a solid yield
In 2024, Barratt Redrow paid a total dividend of 16.2p, giving a present yield of 4.3%. The average yield of the FTSE 100 is only 3.6%.
However, analysts forecast these payouts will increase to 16.7p in 2026, 20.2p in 2027, and 27.1p in 2028.
Based on the current share price, these would generate yields of 4.4%, 5.3%, and 7.1%.
Will I buy the shares?
I think UK housing is a long-term investment prospect. As I am aged over 50 now, I am toward the end of my investment cycle, so it is not for me.
However, for younger investors, I think the stock is well worth their consideration.
