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I think this FTSE 100 stock is cheap, but it could be too risky

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One industry facing severe consequences in this bear market is that of housebuilding and construction. 

Many housebuilders have shut up shop with the closure of all show homes and sales offices. In addition, all construction sites linked to these companies have ceased operating. 

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A few weeks ago I wrote about Taylor Wimpey and suggested it would be one to avoid now. I would like to note that some may see these ‘ones to avoid’ as opportunities. Barratt Developments (LSE:BDEV) is also facing similar problems to those of its rivals. 

Profile and performance

 

The UK-based developer specialises in residential new builds across the country. It also has a commercial brand that builds offices as well as retail and leisure spaces. Barratt operates through six core regions and 27 operating divisions and directly employs over 6,000 people.

When the Covid-19 pandemic upset the UK markets, Barratt’s share price saw a decrease of approximately 45%. Mid-March saw a three-year low of 364p per share. At the time writing, a mini fightback had occurred and the per share price now trades at over 500p. 

Covid-19 update

Barratt released a trading and Covid-19 update at the end of March. The outlook for year-end results (which is 30 June for Barratt) was unclear as it does not want to anticipate longer-term results. It did provide an update on several measures to stave off further troubles.

The four main actions were that of suspending all land buying activity. This is a given as there is no indicator around timeframes of this lockdown or the condition of the market post-Covid-19. It also ties in with another measure, that of postponing all non-essential capital expenditure. 

Next, Barratt highlighted the need to manage cash flows carefully and ensure employees, suppliers, and sub-contractors were paid on time. Finally, it announced that all recruitment activity would be suspended until further notice.

Furthermore, Barratt, like many other companies out there, announced that it would be cancelling an interim dividend. Due be paid out in May, this will save the company approximately £100m. This is a smart and unsurprising move, in my opinion, especially in the light of current market conditions.

The business does have a healthy cash pile of £380m which will go a long way to seeing it through this sticky patch. With a price-to-earnings ratio of 7, I do not see a huge risk in the stock at this time. 

Burning questions

Barratt has been performing admirably over the last few years. Profits have been increasing year on year as well as dividend per share. These indicators are a good sign when analysing investment viability. 

My only concern is the current bear market and what happens when we emerge from this. What will the housing market look like post-Covid? Will people be able to afford new homes as if nothing happened? Will housebuilders resume similar levels of activity? I do not own a crystal ball but these lingering questions, among other, would deter me from investing in what looks like a cheap stock. 

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Jabran Khan 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.

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