Persimmon (LSE: PSN) shares are down 34% from their 16 October one-year trade high of £17.21.
This could indicate that the company is simply worth less fundamentally than it was before. Or it could flag a huge bargain opportunity to be had.
To find out which it is, I looked deeper at the business and ran the key numbers.
The business
The firm’s H1 2025 results released on 13 August showed new housing revenue increase 12% year on year to £1.31bn. Underlying profit over the period jumped 13% to £172m.
Its adjusted operating margin edged 0.1% higher to 13.1%, well ahead of analysts’ forecasts of 12.3%.
These numbers followed a 4% rise in new home completions to £4.605bn in H1. The average new home sales price jumped 8% to £284,047.
Underlying return on capital employed rose 1.2% to 11.2% over the period.
Looking ahead, the firm is on course to achieve its previous guidance of 11,000-11,500 completions this year.
Consensus analysts’ forecasts are that its earnings will rise a very robust 14% each year to end-2027.
So, is the share price a bargain?
Persimmon’s 13.5 price-to-earnings ratio is extremely cheap on their against a peer average of 33.9. These firms comprise Bellway at 20.2, Vistry at 27.6, Taylor Wimpey at 42.4, and Barratt Redrow at 45.3.
To put this into a share price context, I ran a discounted cash flow (DCF) analysis. This is a standalone valuation model that identifies where any stock’s price should be. It does this by using cash flow forecasts for the underlying business.
The DCF for Persimmon shares shows they are 42% undervalued at their current £11.29 price.
Therefore, their fair value is £19.47.
The bonus of a good dividend yield
In 2024, Persimmon paid a dividend of 60p, giving a current yield of 5.3%. By contrast, the average FTSE 100 dividend yield is 3.4%. And the present yield on the 10-year UK government bond (the ‘risk-free rate’) is 4.7%.
Investors considering a £10,000 holding in the firm would make £6,970 in dividends after 10 years. This is based on the 5.3% average yield and the dividends being reinvested back into the stock (‘dividend compounding’).
After 30 years on the same basis, the dividends would rise to £38,866.Including the initial £10,000 stake, the holding would be worth £48,866. And this would pay £2,590 a year in dividend income by that point!
Will I buy the shares?
I think Persimmon’s strong earnings prospects will drive its share price and dividends higher over the long term.
However, I am aged over 50 now and consequently at the later stage of my investment cycle. This means I take fewer risks than I did when I was younger. Basically, the younger one is, the more time one can afford to wait for stock market shocks to correct themselves.
A key risk for Persimmon is a macroeconomic shock hitting the UK housing market. Inflation is still rising, worsening the cost-of-living crisis.
Additionally, I have seen many governments fail to meet their own housebuilding targets. Perhaps the current one’s 1.5m new homes built over its five-year term will go the same way.
That said, for investors at an earlier stage of their investment cycle I think the stock is well worth considering.
