Let’s suppose there’s going to be a housing price crash (which, in my opinion, there isn’t), that shares in the nation’s top housebuilders like Taylor Wimpey (LSE: TW) are going to tank (and, in my opinion, they’re not), and that you still think there’s value in investing in property-related stocks. What do I think you should buy?
You could always go directly for bricks and mortar. Or to be more precise, bricks, which is what Ibstock (LSE: IBST) makes.
Dull and unexciting? Yep, that’s me. Oh, you mean Ibstock? That’s even better, as dull and unexciting shares have a strange tendency to keep on rewarding investors for decades while exciting opportunities so often tend to shine briefly then disappear from sight.
Ibstock actually makes concrete construction products as well as bricks, and it’s a profitable business. But the share price has fallen in recent months, so are we looking at a buying opportunity?
My Foolish colleague Royston Wild has explained the reason for the dip, which is largely down to production problems experienced by the company, but he sees it as “a disappointment rather than a legitimate reason to sell.”
I’d go further and suggest that the resulting sell-off is a reason to buy.
On Friday, Ibstock reported the sale of its US brick manufacturing business Glen-Gery for $110m, with the proceeds to be used to repay debt. I don’t like debt and I always see reducing it as a very positive action, and Ibstock says the result should be a reduction in its net debt to around £50m.
There’s an EPS fall on the cards for this year, but the company’s focus on the balance sheet, coupled with a low P/E multiples and 6%+ dividends, makes Ibstock look like a buy to me.
But what about Taylor Wimpey? Its shares have been on a slide all year so far, falling nearly 30% since the start of 2018, so what’s gone wrong with what previously looked like the investors’ favourite housebuilder?
As far as I can see, nothing at all. In the firm’s trading update earlier this month, chief executive Pete Redfern spoke of “a strong performance during the second half of 2018, with very good sales rates supported by positive customer demand and a supportive lending environment.”
He also said the company has “a strong balance sheet in place and a high-quality landbank” which he reckons will lead to “further sustainable growth and cash flow over the medium term.”
The company’s order book is 12% ahead of last year, and that really does not support the doom-mongers’ view that the housing market is set for a slump.
Many investors, I feel, are basing their view on the misunderstanding that housebuilders like Taylor Wimpey need rising property prices to make their money.
That’s nonsense. If selling prices fall, so will the cost of land, and our housebuilders will once again build up their landbanks as they did during the previous cycle.
So while we’re certainly seeing a slowing of the brilliant recovery in the sector over the past few years, I see a forward P/E of only seven for one of the UK’s biggest housebuilders as way too cheap.
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Alan Oscroft 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.