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Bovis Homes Group plc CEO quits — should shareholders follow suit?

The chief executive of housebuilder Bovis Homes Group (LSE: BVS) has resigned. David Ritchie’s sudden departure comes two weeks after Bovis warned that building delays mean that both house sales and profits will be lower than expected for 2016.

Bovis shares have edged higher this morning on news of Mr Ritchie’s departure, but I believe shareholders need to ask whether today’s announcement suggests underlying problems for the firm.

Is this the top?

Bovis still looks cheap on most measures. The group’s shares trade on a 2016 forecast P/E of 7.8, with a prospective yield of 5.5%. Interestingly, Bovis trades on a price-to-book ratio of just 1.1. That’s much lower than most of the group’s peers.

One reason for this low valuation is that Bovis is simply not as profitable as some of the other big housebuilders. The firm’s operating margin is about 15%, compared to figures of more than 20% at its sector peers.

One consequence of these lower margins is that the firm hasn’t generated as much surplus cash to return to shareholders as other firms in sector. Indeed, the group actually reported a small net debt position in last year’s interim results.

Another concern is that while 2016 earnings are expected to be 9% higher than 2015 figures, market forecasts for Bovis’s earnings have fallen steadily over the last year. Broker consensus earnings forecasts have been cut by 9% from 112.9p per share 12 months ago, to just 103.6p today.

You might expect this to be true of the housebuilding sector in general, but it isn’t. A number of Bovis’s peers have delivered upgraded profit guidance over the last year. My view is that given the uncertain outlook for the wider housing market, it makes sense to focus on these potential winners.

I’d give Bovis a miss for now, and might consider selling if I was a shareholder.

A more profitable choice?

One of the top-performing housebuilders of last year was Persimmon (LSE: PSN). Unlike Bovis, Persimmon’s share price has largely recovered from the Brexit sell-off. The larger group’s shares are now trading unchanged on one year ago.

It’s not hard to see why. Consensus forecasts for Persimmon’s earnings have risen by 11% to 194.3p per share over the last year. Full-year profits are expected to be up by 16% on 2015. In last week’s trading update, management said that private sales during the second half of last year were 15% ahead of the same period in 2015, despite the EU referendum.

Persimmon’s figures highlight another key attraction: this business is extremely profitable. The group’s operating margin rose to 23.8% during the first half of last year, and it trades on a price-to-book ratio of 2.5. As we’ve seen, the equivalent figures for Bovis are 15.5% and 1.1.

This higher valuation reflects the market’s belief that the company can generate superior returns from its assets. I believe Persimmon’s history of strong returns, plus its improving outlook, make it one of the top picks in the housing sector.

Persimmon currently trades on a forecast P/E of 10, with a prospective yield of 5.6%. If you’re looking for exposure to the housing market, this could be a smart choice.

Are these stocks today's top income buys?

Many housebuilders offer attractive dividend yields. But these are cyclical businesses. At some point, the housing market will slow and dividends may be cut.

If you're looking for income stocks with the potential to grow their dividend payments for the foreseeable future, then I believe you need to look elsewhere.

I strongly recommend you consider the companies featured in 5 Shares To Retire On. Each of these stocks has been handpicked by our income experts for its long-term profit potential.

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Roland Head 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.