Investors in housebuilders have had a roller-coaster ride over the last year or so. The share price of Britain’s largest volume builder, Barratt Developments (LSE: BDEV), started 2018 at 648p, but slumped 33% to a low of 434p by 17 December. However, it’s since rallied hard, climbing to 562p, helped by a warm reception for its half-year results yesterday.
Meanwhile, investors in medical devices group Smith & Nephew (LSE: SN), which put out its annual results this morning (also well-received by the market), have had a less tumultuous time. However, it’s the future I’m really interested in, and where these two FTSE 100 stocks could go from here. Do I think they could make or break your wealth in 2019?
Earnings outlook
There’s considerable uncertainty about the earnings outlook for Barratt. The table below shows City analysts’ earnings per share (EPS) forecasts for its current and next financial years, according to Reuters.
| No. of analysts | EPS (mean) | EPS (high) | EPS (low) | |
| Year ending June 2019 | 15 | 67.3p | 74.9p | 47.2p |
| Year ending June 2020 | 15 | 68.6p | 81.8p | 33.1p |
As you can see, there’s extreme divergence in the range of projections. For fiscal 2020, the high estimate of 81.8p is 19% above the mean, while the low of 33.1p is 52% below. At the current share price, the price-to-earnings (P/E) ratio ranges from 6.9 (cheap) to 17 (expensive).
Meanwhile, Barratt’s intended dividend returns (ordinary and special) of 44.2p (7.9% yield) for 2019 and 44.7p (8%) for 2020, are partly calculated with reference to the Reuters EPS mean.
Brexit
Bank of England governor Mark Carney warned last September that house prices could crash as much as 35% over three years in the event of a no-deal Brexit. If such a divorce were to trigger a crash, even the lowest EPS forecasts for Barratt, as well as the prospective dividend yields, would go out of the window. The shares would get hammered.
However, in the event of an orderly Brexit, I think the market would likely see the mean or upper-end EPS forecasts as reliable and the dividend as sustainable. The shares could continue to rally, although, as I’ve argued in a recent article, I think there’s a risk of a housing correction or crash — regardless of the Brexit outcome. This wold be due to unprecedented levels of consumer debt, and the world moving towards a phase of quantitative tightening and rising interest rates. Personally, I’m happy to avoid Barratt at this stage.
Stability and visibility
Unlike the notorious boom-and-bust housebuilding industry, healthcare tends to be a more stable sector through the ups and downs of economic cycles. Smith & Nephew today reported underlying revenue growth of 2% for its financial year ended 31 December. Underlying EPS rose 7% and the board increased the dividend by 3%.
Turning again to Reuters and City analysts’ forecasts, we find a marked difference to Barratt in terms of the range of EPS projections:
| No. of analysts | EPS (mean) | EPS (high) | EPS (low) | |
| Year ending December 2019 | 14 | $1.00 | $1.10 | $0.94 |
As you can see, the range is far narrower for Smith & Nephew, the extremes being just 10% above and 6% below the mean. This reflects the superior stability and earnings visibility of this international medical devices business.
At a share price of 1,500p, the P/E is between 17.6 and 20.6, while there’s a prospective dividend yield of 2%. I believe the company merits this premium valuation, and I rate the stock a ‘buy’.
