Why I’d buy Taylor Wimpey plc but sell Travis Perkins plc

The sturdy state of the UK housing market was again underscored by FTSE 100 giant Taylor Wimpey (LSE: TW) in Thursday trade, resulting in the stock moving within a whisker of fresh 10-month highs.

In its latest update Taylor Wimpey noted that private net reservations rates had risen 16% between January-April, to 0.93 sales per outlet per week, and that its order book stood at a sturdy 9,219 homes versus 8,811 a year ago.

Meanwhile Taylor Wimpey’s cancellation rate stood at just 10%, and also down from 11% in the corresponding four months last year.

Celebrating the results, chief executive Pete Redfern commented that “weve had a good start to 2017, with positive customer demand and good mortgage availability supporting a strong sales rate.” He added that “we remain well positioned to make further progress in 2017 which supports us in our strategy to deliver sustainable growth and returns through the cycle.”

A fly in the ointment, however, was news that Taylor Wimpey has put aside £130m to deal with complaints from customers who have seen ground rents double under the terms of existing leases.

A brilliant bargain

Despite the steady stream of positive data from Taylor Wimpey and its peers, not to mention broadly supportive housing industry data, I believe the market continues to underestimate the builder’s vast investment potential.

So while the business has added 30% in value since the start of 2017 as predictions of a property price crash have floundered, I reckon Taylor Wimpey’s low valuations leave room for plenty more strength.

After a raft of forecast upgrades in recent months, the City now expects the London business to record a 7% earnings rise in 2017, and to build on this with a 5% advance in 2018. As a result Taylor Wimpey deals on a forward P/E ratio of just 10.3 times, hovering well below the FTSE 100 prospective average of 15 times.

And the construction colossus also trumps the 3.5% average dividend yield offered by Britain’s blue chips, too, Taylor Wimpey throwing uout figures of 6.8% and 7.3% for 2017 and 2018 respectively.

I reckon the builder is too good to ignore at these prices.

Merchant in the mire

The same cannot be said of specialist Travis Perkins (LSE: TPK), however, particularly as Thursday’s trading update underlined the huge challenges the building supplies specialist faces.

While Travis Perkins saw like-for-like sales rise 2.7% during the first three months of 2017, the Wickes and Toolstation owner warned that it expects “mixed trading conditions” for the remainder of the year.

And a murky trading outlook is not the only headache for the merchant as weak sterling steadily pushes up costs, and particularly at its Plumbing & Heating and Contracts divisions.

The number crunchers expect Travis Perkins to endure a second successive earnings fall in 2017, a predicted 5% decline currently on the board. But while a 7% bottom-line rebound is anticipated for next year, I believe sinking consumer sentiment could put paid to these hopes, and that these risks fail to be reflected by a forward P/E ratio of 13.9 times.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.