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Why I’d buy Barratt Developments plc and this other bargain growth stock today

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The UK housing market is one of the wonders of the world, defying Brexit uncertainty for nearly 18 months now. The housebuilding sector was hit harder than most in the referendum aftermath, but has fought back gamely.

BDEVilled by uncertainty

The UK’s biggest housebuilder, Barratt Developments (LON: BDEV), has enjoyed a good 12 months, its share price rising 30% in that time. It is down 1% at time of writing after today’s trading update for 1 July to 12 November, but that seems a harsh response for a company I have previously labelled a FTSE 100 bargain.

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Today’s report hails a “strong start to the year supported by a positive market backdrop”, with demand for new homes supported by wide availability of attractive mortgage finance. The sales rate has stayed firm at 0.74, exactly the same as in 2016, while total forward sales including joint ventures jumped 8.4% to £2.88bn. That equates to 12,843 plots, up from 11,733 last year.

Dividend delight

Investors have been handsomely rewarded, with the board proposing a record dividend payment of £348m, made up of a £173m final dividend and £175m special dividend, equivalent to 5.5% of its market capitalisation. CEO David Thomas said the outlook remains bright as operational improvements and improved margins should deliver a good performance in full-year 2018. It also expects to deliver “modest growth in wholly-owned completions”. That word “modest” may partly explain today’s share price dip, although it is worth noting that the market is down generally.

Barratt still looks like a buy to me, especially trading at a bargain 10.2 times forward earnings. It has delivered five consecutive years of double-digit earnings per share (EPS) growth (actually it was triple-digit in 2014) with another 5% predicted for 2018. By then, the yield is forecast to be a whopping 7%. Yes, I know the UK is riddled with economic uncertainty, house prices are high and interest rates rising, but I reckon these uncertainties are reflected in the price.

Falling bricks

FTSE 100-listed Barratt isn’t the only housebuilder updating the market today, FTSE 250 firm Crest Nicholson Holdings (LON: CRST) has issued numbers for the year to 31 October and here the market response has been harsher: its share price is down 5.36% at time of writing. Catching a falling knife is always tempting.

The headline numbers look positive with overall housing unit completions up 2.3% at 2,935 homes in 2017, average selling prices rising 5.4% to £391,000, EBIT margins consistent with previous guidance at the top end of the 18% to 20% range and return on capital employed approaching 30%.

London calling 

There was a slight dip in underlying sales rates for the year, which averaged 0.77 sales per outlet week against 0.81 in 2016, which reflects the increase in the group’s average selling prices and the softer central London market. Sales rates remain “generally strong” for properties below £1m.

Total forward sales of £391.4m are 13.6% higher than last year but some analysts have expressed disappointment, with Shore Capital calculating that Crest Nicholson’s profits before tax could now fall closer to £205m than the consensus £213m. However, the investment case looks strong to me, with forecast EPS growth of 7% in 2017 and 13% in 2018, a forward valuation of just 7.8 times earnings, and a forecast yield of 6.5% covered 1.9 times. I reckon the housing market stands on firm foundations.

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Harvey Jones has no position in any of the 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.

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