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Why I think the Taylor Wimpey share price is in for a great 2020

For a long time I’ve rated the Taylor Wimpey (LSE: TW) share price as a bargain buy. I still do. In fact, I think all our housebuilders look good value. And the only reason I haven’t bought any Wimpey shares is that I already own some Persimmon.

Over the past 12 months, Wimpey shares are up an impressive 36% while the FTSE 100 is up 11%. Over five years, we’re looking at a 58% gain, even though the property market has weakened. But valuations still look low to me, and I see the housebuilding business as resilient.

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Good trading

Tuesday’s year-end trading update from the biggest in the sector strengthens my view. Chief executive Pete Redfern said “Despite an uncertain political and economic backdrop in 2019, we have continued to experience a good level of demand for our homes and trading in the second half of the year was as anticipated.” Sales reached a new record, and completions were up approximately 5% over the year.

London and the Southeast presented “more challenging conditions,” as did higher price-point sales. But I don’t see that as taking much shine off this update, not with our chronic housing shortage continuing.

The slump in housebuilder share prices has been, I’m sure, entirely down to the Brexit scare. Investors have expected a property price slump as an outcome, but the pessimism has surely been overdone. Housebuilders don’t need rising prices to make money, just a difference between selling prices and the cost of building up land.

Healthy sales

Taylor Wimpey’s selling prices remained resilient, with the average of £305k up 1% from 2018’s £302k. There’s an order book going into 2020 valued at £2,176m, nicely ahead of £1,782m at the start of last year. 

On the downside, building cost inflation hit 4.5%, well ahead of the rise in selling prices. But the firm says cost pressures have been softening over recent months.

The Conservative election victory seems to have brought some confidence back to the sector too. And that adds to my feeling that Taylor Wimpey is in for a good year. But there are still risks, and failure to reach a trade agreement with the EU could tip us into recession. That would surely have an adverse effect on builders, and I’d expect to see share prices dip again.

Still, Prime Minister Boris Johnson is apparently accepting that a year actually might not be quite enough time for negotiations.

Share price valuation

Taylor Wimpey’s full results are due on 26 February, and analysts are expecting a 5% fall in earnings per share. That would give us a price-to-earnings multiple of 10.4, which looks cheap to me. High dividends, expected to yield 8.6%, make that look even better value. And the icing on the cake is the firm’s cash balance, which stood at £392m at 30 June.

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Alan Oscroft owns shares of Persimmon. 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.