With the likelihood of higher interest rates becoming more of a reality with each piece of economic data that passes on either side of the Atlantic, I am finding myself compelled with an ever greater sense of urgency, to understand which companies are likely to remain afloat in rough seas and which ones are likely to sink.
Cornering The Housing Market With Countrywide and Foxtons
My attraction to these two companies is built upon one expectation. This is that a combination of higher rates and a stricter regulatory approach to mortgage affordability will see many people’s prospects of home ownership reduced, and that this will probably see ever greater numbers driven into the rental market as time elapses.
For Countrywide, with its almost even split between estate agency sales and residential lettings, this is good news.
It already held the largest network of lettings agents in the UK, even before this year’s acquisitions, which should now provide it with an effective hedge against any downturn in actual sales volumes over the coming quarters.
Neither the balance sheet nor the valuation appear too demanding for a company whose earnings prospects are, at the very least, reasonably bright, with gearing at just 14% and the shares trading at 13.4x the consensus for EPS in 2015
Foxtons is also similarly attractive, although its bias toward estate agency sales means that it is a less preferable alternative for me. The London-centric nature of the group could also pose a problem if recent changes to stamp duty rates prove to have more of a dampening effect upon activity in the capital than was first thought.
In addition, with a price-to-earnings based valuation of 19.5x the consensus for 2015 EPS, the group is not just higher risk but it is also more expensive than the diversified Countrywide.
Nevertheless, with low gearing and a good record of generating growth behind it, Foxtons is also one to watch in the coming quarters.
Zoopla and Rightmove: The Digital Revolution And The UK Property Market
Companies like Zoopla and Rightmove are also worth looking at for those investors who cannot face turning their back on the UK property market. Each is a property portals that earn fees from both estate agents and lettings agents.
As digital businesses, they both benefit from lighter cost structures, lower gearing and higher margins, while returns on equity (20%+) are also above those of the high-street-based operations like Countrywide and Foxtons.
However, on the downside, valuations at both Rightmove and Zoopla are not nearly as light as their balance sheets, with current multiples at 33.2x and 27.8x the consensus for 2015 EPS respectively.
As a result, investors will certainly pay for any future growth here.
While I believe that all of these businesses would prove to be at least a reasonable investment over time, many will remember that it was a Countrywide consortium that created Rightmove back in 2000, while the firm also still holds two boardroom positions and a sizeable stake in the recently listed Zoopla.
Given that these two digital wonders are both, in one way or another, products of Countrywide’s innovation, I can’t help but suspect that it is Countrywide which is the better investment of them all.
Certainly, with it presenting as the cheapest of the bunch at present, it would appear to be almost a “no-brainer” for those who are looking to invest only in the one company.
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James Skinner owns shares of Countrywide. 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.