It’s not unusual for FTSE 250 companies to experience short-term share price declines. However, it’s unusual to see a drop of 43% in the space of just one month. This is what has just happened to the Vistry (LSE:VTY) share price, leading to some people getting rather worried. So what exactly has gone wrong?
The weight of problems
The primary factor came earlier in March when Vistry warned that profit margins would fall this year because it’s offering incentives to boost sales and generate cash. It noted that buyers are struggling with affordability, so with the need to keep sales going, it’ll look to offer financing support and other measures. Naturally, lower profit margins will likely mean lower profits, causing the stock to fall.
Another factor was that the full-year results weren’t amazing. Revenue was down by 4%, with the CEO noting “near-term market conditions remain challenging and current international events introduce new uncertainty”. Talking about the CEO, Greg Fitzgerald, raises another point of recent concern for investors. At the start of March, it was revealed that he will retire from the top job after nearly nine years. He will remain as CEO for up to a year to facilitate a transition, but it adds another layer of uncertainty to operations for the year ahead.
Finally, the business is under pressure from a less direct angle. The conflict in the Middle East is driving energy prices higher. If sustained, this will feed through to higher UK inflation. This has already caused investors to adjust their forecasts for where interest rates go this year. Instead of anticipating multiple cuts, we could see the base rate stay on hold, or even increase. This is negative for Vistry, as higher interest rates also raise mortgage costs, further dampening consumer demand.
The direction from here
The sharp fall has pushed the stock to the lowest level in over a decade. Some may think this is a good time to buy, believing the stock to be undervalued. The price-to-earnings ratio has dropped sharply, and is now at 6.88. I use 10 as a fair-value ratio, so it’s clearly below that.
If we take a step back, it’s true that the UK still has a chronic housing shortage, especially affordable housing. Data shows that Vistry builds one in seven affordable homes in the UK. So long-term demand should be strong for the business if it can weather the short-term storm.
However, it’s a high-risk opportunity. The push to quickly sell properties has me worried about short-term liquidity pressures internally. If this is the case, it could be forced to take on higher debt to keep operating. This could lead to higher costs and weigh down the company further.
Even though I think the stock has suffered an excessive fall, I’m going to wait for a few weeks to see where the price settles before thinking about buying. It’s been a one-way ticket lower for the past few weeks, and there’s nothing right now that suggests it’s slowing down.
