The Persimmon (LSE: PSN) share price ended Thursday (13 November) with a 3.3% rise, on the back of a very solid third-quarter update. It dipped 5% Friday morning though, but pulled most of that back.
Despite “some softening in the market since the summer,” Persimmon saw its private forward sales position improve 15% to £2.09bn since the same period a year ago. With a modest average selling price rise of 1.5%, that’s 13% more homes.
Why Friday’s wobble? Sentiment appears to be weakening ahead of the Budget. And analysts have been paring back their price targets a bit over the past few months. They’re showing a bit more caution on the building industry as the UK’s economic weakness continues — UK growth has just slipped to 0.1%.
But negative short-term sentiment can open up better buying opportunities for long-term investors. And we could be seeing one here.
FY25 on track
CEO Dean Finch said the company is “on track to deliver our 2025 performance in line with market expectations.” That’s based on a consensus for 11,293 new home completions in the year, with underlying profit before tax of £429m.
If it comes off, that should mean a 5.9% rise in completions with profit up 8.6% from the 2024 full year. I rate that a good result any time, and especially in a year of high inflation and mortgage rates.
Margins are still likely to be an issue. Last year’s underlying operating profit margin came in at 14.1%, and any improvement in that by year-end would be welcome.
The company did say “we are confident the business will increase margins … over the medium term.” But delays could hamper confidence and hold the Persimmon share price back.
Key strengths
Speaking of Persimmon’s strengths, the CEO included land investments and vertical integration. Land holdings are substantial at around 83,800 plots, up 3% over the past year.
And that vertical integration thing could prove a significant benefit on the cost front, with supply costs rising. Persimmon owns its own brick, tile and timber frame facilities. And it does its own in-house planning and sales.
Analysts at Hargreaves Lansdown estimate that can save around £5,000 per plot. It could give the company a competitive edge at the affordable end of the market in the coming years. And I think that could be quite significant when interest rates start to come down a bit more seriously.
Long-term buy?
Forecasts put the Persimmon share price on a price-to-earnings (P/E) ratio of 13.5 for this year. Given the headwinds facing the sector and such an uncertain economic outlook, I think that’s probably about on the money.
But if analysts are right, rising earnings could bring that multiple down to 10.5 by 2027. And we could see a 5.8% dividend yield by then. If interest rates do indeed fall significantly in the next two years, I think Persimmon shareholders should be smiling.
My verdict? Long-term investors should definitely consider Persimmon, and I’m holding. But I’m watching those margins.
