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Here’s why I’d buy into the Taylor Wimpey share price today

I really don’t understand why Taylor Wimpey (LSE: TW) shares are on such a low valuation, and are so volatile. On the valuation front, after a 5% morning drop on first-half results day Wednesday, the shares are trading on a prospective P/E of around 8.3. That’s not for a company that’s struggling, or one that’s laden with debt.

Cheap?

Sure, there’s a small drop in EPS on the cards this year. And I think we’re very likely in for a relatively flat couple of years after that. But it’s been expected for some time, and there’s nothing wrong with that. And Taylor Wimpey is still generating lots of cash and paying handsome dividends.

The first six months of the year saw the firm complete 6,541 new homes, up slightly from 6,497 a year previously, though operating profit dropped from £344m to £312m, due to high build costs and a changed geographic mix. The company ended the period with net cash of £392m — that’s down from £525m, but cash can be lumpy over the short term because of the timing of land payments and of investment in work in progress.

Big dividends

Including special dividends, shareholders are expected to pocket 18.3p per share in 2019, and 18.6p in 2020 — for total yields of 11%.

Chief executive Pete Redfern told us that “conditions for the housing market continue to be supportive with good affordability and access to finance,” and said full-year results should be in line with expectations.

Brexit or not, the UK’s chronic housing shortage won’t be ending soon. And cooling property prices shouldn’t really be a problem for housebuilders, which still make their margins whether land and house prices are rising or falling. So Taylor Wimpey is firmly on my income share buy list.

Disliked

If Taylor Wimpey shares are out of favour right now, those of estate agent Countrywide (LSE: CWD) appear to be positively despised. Earnings have collapsed, leading to a five-year share price crash of 98%. But it’s been ticking up modestly since a low point in June, and Wednesday’s first-half results suggest Countrywide’s recovery plan is starting to deliver.

Total income dropped by 4% to £291m, largely in line with expectations. But the firm recorded an operating profit of £10m, from a loss of £3.3m a year ago. And EPS turned modestly positive, at 0.3p from a prior loss of 2.7p.

Speaking of “the increased momentum in sales of complementary services and cost actions taken in the first half,” Countrywide expects the second half to show stronger progress.

Downside

But there’s still significant net debt, at £90m, which is 3.4 times adjusted EBITDA. That’s a major concern for me, and though the firm says its new covenants with lenders should help it through, I fear any faltering of the current recovery progress, or other hurdles that might be encountered along the path, could plunge the company back into crisis.

Forecasts suggest 2020 will bring an acceleration of EPS. Admittedly, it would still be tiny compared to previous years, but it would bring the P/E down to 10, and further recovery in 2021 might even see that valuation fall considerably lower. So is Countrywide an attractive recovery play right now?

Possibly, but the risks as too high for me. I’d need to see firm recovery progress and some debt reduction first.

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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.