Could these former market darlings fall another 50%?

2016 is shaping up to be a year shareholders of Countrywide (LSE: CWD) and Foxtons Group (LSE: FOXT) would rather forget. Shares in the two estate agents, once highly sought after following their respective IPOs, are down by 52% and 44% respectively so far in 2016. And over the past 12 months, shares in Countrywide are down 59% and shares in Foxtons have lost 48%. 

Unfortunately, it looks as things are going to get worse before they get better for these companies as the outlook for the UK property market deteriorates. 

Revenue sliding 

Last week, Foxtons reported that revenue for the third quarter had slipped to £37.5m from £43.5m, with revenue for the nine months ended 30 September 2016 totalling £106.3m, down from £114.5m in the same period last year. There’s no other way of putting it, these figures are pretty terrible and if industry figures are anything to go by, the London property market isn’t going to pick up any time soon. 

Indeed, a week before Foxtons announced its Q3 trading update, property consultant Knight Frank LLP revealed that over the year to the end of September, prices in the prime central London areas declined 2.1%, with Chelsea and Hyde Park hardest hit as prices fell 9.8% and 7.5% respectively. Meanwhile, Countrywide suggested in August that property prices in Greater London could fall by 1.25% during 2017. 

Moreover, the Land Registry published data for June last week that showed transactions in England were down 32% year-on-year and 54% in inner London.

Dark future

City analysts expect the property market turbulence to have a significant impact on Foxtons’ and Countrywide’s income. 

Specifically, analysts have pencilled-in a 49% decline in Foxtons’ earnings per share for this year, an astonishing fall especially for a company trading at a growth multiple of 16.9 times forward earnings. Analysts are expecting a slight pickup in earnings next year. Earnings per share growth of 15% is currently expected for 2017 but with so much uncertainty overhanging the market, it remains to be seen if the company can hit this target. Even after falling 44% year-to-date, based on these projections I believe that Foxtons’ shares still look expensive and as a result, of their premium valuation, further declines could be ahead. 

Meanwhile, analysts at investment bank Jefferies have slashed their price target on Countrywide this morning from 180p to 300p. Thy’ve also cut their 2016 earnings per share estimate for the company by 24% and their estimate for 2017 by 31% off the back of weak housing transaction data from the Land Registry. Consensus is only calling for a decline in earnings per share of 14% this year, followed by growth of 5% for 2017, which appears optimistic considering Jefferies’ dismal figures. Countrywide’s 7.4% dividend yield could also be under threat if Jefferies’ projections come true.

The bottom line 

All in all, cracks are starting to show in the UK’s property market and City analysts widely expect Foxtons’ and Countrywide’s earnings to fall further before they get better. It’s not unreasonable to expect further declines in their shares as a result. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.