Shares in FTSE housebuilder Bellway (LSE: BWY) are down 20% from their 30 October 12-month traded high of £31.52.
That said, they rose over 5% on the 14 October release of the firm’s full fiscal year 2025 results. And I was not surprised for two key reasons.
First, the results document also contained the announcement of a £150m share buyback to be completed within a year. These tend to support share price gains. And second, the overall numbers looked very good.
Housing completions jumped 14.3% year on year to 8,749 homes at an average selling price of £316,412 (against 2024’s £307,909).
Revenue climbed 16.9% to £2.783bn, while underlying operating profit soared by 27.5% to £303.5m. Earnings per share came in at 176.7p – a rise of 30.7%.
Looking ahead to 2026, the firm expects a healthy order book and work-in-progress position will support its growth plans. This is for completions to rise to 9,200 and for the average selling price to be around £320,000.
Bearish and bullish factors
A short-term risk factor flagged by the firm is ongoing housing affordability constraints in the UK. It highlighted that these could be exacerbated by potential stamp duty hikes in the upcoming 26 November Budget.
I think other hikes in taxation remain a long-term risk too, adding to the already heavy cost-of-living pressure for many.
I believe another longer-term risk is the government failing to meet its target of 1.5m homes being built over its five years. Every government under which I have lived has failed to meet this objective.
However, more bullish are the government’s changes to the Planning and Infrastructure Bill announced on the same day as Bellway’s results. These are aimed at streamlining the approval process for major housing projects, helping it to meet its 1.5m target by 2029.
Consensus analysts’ forecasts are that Bellway’s earnings will rise by a robust 17% a year to end-fiscal year 2027.
And earnings growth is the key driver of any firm’s share price (and dividends) over the long term.
Is there a major price-to-valuation gap?
A stock’s price is simply whatever the market will pay at any point. Its value reflects underlying business fundamentals. The gap between the two is where the big long-term investments can be made, in my experience. This is because over time asset prices tend to converge to their true value.
The best tool I have found to identify this gap is the discounted cash flow model. This pinpoints where any stock price should be trading, derived from cash flow forecasts for the underlying business.
For Bellway shares, it shows they are 32% undervalued at their current £25.30 price.
Therefore, their fair value is £37.21.
My investment view
I am sceptical about any UK government’s commitment to dramatically increase the housing stock. I am also sceptical that the longstanding cost-of-living crisis will abate any time soon.
So the UK housing sector, and therefore Bellway, is not for me.
However, I do think that its earnings prospects will push it share price much higher over the long term. Therefore, for less sceptical investors – particularly those at an earlier stage of the investment cycle – I think it IS worth considering.
