Taylor Wimpey (LSE: TW), Persimmon (LSE: PSN), Barratt Developments (LSE: BDEV), Rightmove (LSE: RMV) and estate agent Foxtons (LSE:FOXT) are all sliding today, after City analysts issued a warning about the state of the UK property market.
Factors such as negative news flow on UK mortgage approvals, a falling number of housing transactions and slower-than-expected economic growth, were all cited as reasons to avoid the sector. Foxtons in particular was targeted by analysts, as average home values dropped in a third of London’s boroughs during November.
What’s more, City analysts also picked up on the fact that Taylor, Persimmon and Barratt have all recently been promoted to the FTSE 100 index. Rather ominously, the last time these three companies were included in the index was at the end of 2007, just before the financial crisis.
A reason to worry?
After today’s declines, Taylor Wimpey, Persimmon and Barratt have all underperformed the FTSE 100 by a high single-digit percentage this year, even though the year is only a few days old.
However, it would appear as if the market is overeating to the City’s pessimistic forecasts. Indeed, within the past few months all three of these home builders have issued upbeat trading statements with strong outlooks.
For example, at the beginning of November Barrett’s management stated that:
“…The group expects to deliver a further significant improvement in performance in the full year 2015.”
As a sign of this confidence, the group plans to return around £950 million of cash through ordinary dividends and special cash payments to shareholders over the next three years. Taylor is also upbeat about the future. Once again, at the beginning of November management noted that:
“…This stable but improving environment should be positive for both homebuyers and homebuilders. Looking ahead, we are well positioned to deliver further improvements across the business in 2015 – 2017.”
Similarly, Persimmon’s management reported that:
“…We remain encouraged by the level of customer confidence in the UK housing market. Visitor levels have matched those of the prior year…as a result of the strong progress the group has made, and against the backdrop of an improving housing market, the Board is recommending that the original Capital Return Plan schedule be accelerated.“
So, based on these statements, the outlook for home builders appears relativity upbeat, despite the pessimistic view of City analysts.
On the other hand
On the other hand, the outlook for Foxtons and Rightmove is more uncertain.
Rightmove currently trades at a forward P/E of 21.3, which does not leave much room for error if the company fails to meet lofty growth forecasts. City analysts are expecting the company to report EPS growth of 14% this year, followed by growth of 13% during 2016.
If the company fails to meet these targets, then Rightmove’s shares could fall rapidly back to earth. A rising number of visitors to Rightmove’s website has driven growth over the past few years. So a declining interest in home buying could hit Rightmove hard.
Meanwhile, Foxtons lacks the national reach of the home builders above and Rightmove. The company is London-focused, so its fortunes are highly dependent upon the state of the capital’s property market.
With prices falling across London, Foxtons’ income is likely to follow suit. The City is expecting the company to report EPS growth of 11% this year. With home prices falling, it’s going to become harder and harder for Foxtons to hit this target, increasing the risk of a profit warning.
The bottom line
All in all, it remains to be seen if the red hot UK housing market is starting to cool but the home builders don’t seem to be worried. The same can’t be said for Foxtons and Rightmove, it might be time to take profits on these companies and seek better opportunities elsewhere.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.