On the face of it, the half-year trading update released today by Barratt Developments (LSE: BDEV) was full of good news. In the six months to December it finished 2% more homes than the year prior, the value of forward sales were also up by 2%, and average selling prices for its homes at completion leapt 6.5%, showing housing price inflation isn’t done yet.
But, despite all this good news, the shares are down 2.55% at the time of writing. And unfortunately, it’s nothing under the group’s control that’s loosening the once mighty hold homebuilders held over investors.
The main reason, of course, is the jitters over the state of the UK economy and the domestic housing market in particular. This is nothing new, and with every new survey that shows consumer confidence weakening in addition to the normal gossip over the Brexit process, expect the uncertainty to further lower demand for homebuilders.
On top of this, there is also the growing outcry amongst the public and certain sections of the press against the government’s Help To Buy scheme that some are claiming did nothing to alleviate the housing shortage and instead simply lined the pockets of homebuilders and their shareholders. With over 40% of its homes sold with Help To Buy backing, any changes to this programme would be understandably negative for Barratt.
These headwinds and rising interest rates are why I reckon buying Barratt at this point in the economic cycle could be a mistake, despite the seemingly cheap valuation of 10.4 times earnings and respectable 3.85% dividend yield.
Maybe there is such a thing as too many pubs
Another company that has been growing quickly, kicks off a nice yield and is trading at 10 times earnings but is still on my list to avoid is pub chain Greene King (LSE: GNK). This is because operating pubs is a tough, low-margin business that is becoming more difficult by the day due to governments seeing alcohol as an easy source of added tax revenue and, more importantly, shifting consumer consumption habits.
It’s no secret that pubs have fallen out of favour with young Britons as eye-wateringly high prices for a pint and a more health-conscious outlook has led them to increasingly avoid their local in favour of more upscale craft beers or spirits at home. For several years pub groups have got around this by increasing food offerings. But in a crowded market where it’s never hard to find a moderately priced burger and sweet potato fries, the likes of Greene King have found themselves in a highly competitive market with low barriers to entry.
These challenges coupled with mediocre at best consumer confidence figures are already taking a toll on it with group revenue down 1.2% year-on-year in the six months to October and underlying pre-tax profits down a whopping 8%. This is bad news for the company as its huge £2.2bn in debt is a full 4.2 times EBITDA. That’s not crazy for the property group it is, but does significantly constrain management’s ability to go out and invest heavily in updating the portfolio to more readily match changing consumer consumption habits.
With industry-wide problems mounting and already taking a toll on the group’s income statement, I’ll be steering well clear of Greene King in the New Year.
Ian Pierce 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.