Today’s trading update from Bellway (LSE: BWY) is encouraging and shows that the company is making good progress. For example, its average reservation rate in the 18 weeks to November 30 rose to 147 from 144 in the comparable period. In addition, Bellway is now guiding the market towards an operating margin of 20%, which is slightly higher than the 19% that has been priced in by the market until now. Furthermore, Bellway expects volume growth to be higher than 10% in the current year.
Despite this, shares in Bellway have fallen by 3% at the time of writing, with broker rating downgrades seemingly the main reason. Certainly, Bellway has stated that trading in the housing market has returned to more normal conditions in terms of there being a seasonal pattern, although it remains on-track to meet its volume growth targets for the full year. With demand for new housing being relatively resilient, and the government’s Help To Buy scheme also being a positive contributory factor, Bellway seems to be have a bright future ahead of it.
In terms of increases in profitability, Bellway offers excellent growth prospects. For example, it is forecast to post earnings growth of 26% in the current year, which is roughly four times the expected growth rate of the wider index. And, with Bellway trading on a price to earnings (P/E) ratio of just 9.3, this equates to a price to earnings growth (PEG) ratio of just 0.4, which is hugely appealing and shows that the stock offers stunning growth at a very reasonable price.
Of course, Bellway isn’t the only house builder with bright prospects. For example, sector peers such as Berkeley (LSE: BKG), Persimmon (LSE: PSN), Bovis (LSE: BVS) and Taylor Wimpey (LSE: TW) all have upbeat growth prospects and trade at attractive valuations, too.
For example, Persimmon has a P/E ratio of 12.6 and is expected to see its bottom line grow by 43% in the current year, followed by growth of 22% next year. That’s a key reason why its share price is up 22% this year and, looking ahead, there could be more upside on offer due to Persimmon having a PEG ratio of just 0.4.
Meanwhile, Bovis and Taylor Wimpey have also seen their share prices rise strongly during the course of 2014. They are up 7% and 16% respectively and, like Persimmon and Bellway, could make more gains next year due to them having highly appealing growth prospects combined with highly enticing valuations. For example, Bovis has a PEG ratio of just 0.3, while Taylor Wimpey’s is even more appealing at just 0.2.
Berkeley Group, with its focus on prime London property, is perhaps the odd one out of the group. That’s because its growth rate is expected to be around 8% per annum over the next two years which, while very encouraging, is somewhat behind that of its peers. This is at least partly due to the London prime property market already having grown at a rapid rate in recent years, which means that a cooling off process is somewhat inevitable. Still, Berkeley offers a PEG ratio of 1.1, which indicates it remains a strong buy.
Clearly, there is huge potential in the house building sector and all five of the companies discussed here could be well-worth buying at the present time. However, as a result of its PEG ratio of just 0.2, Taylor Wimpey could prove to be the best of a lucrative bunch during the course of 2015.
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Peter Stephens owns shares of Bellway, Persimmon, Berkeley Group and Taylor Wimpey. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.