The coronavirus crisis has led to a 25% FTSE 100 crash. But the prospect of at least another three weeks of lock-down hasn’t caused any more pain so far this week. The top index seems to be holding steady at around 5,600 points. But that hides big swings among individual stocks, and we’re seeing double-digit percentage gains and losses almost every day.
FTSE 100 crash survival
The company has suspended its land-buying and recruitment, and shelved all non-essential capital expenditure. The interim dividend is canceled too, as Barratt concentrates on its cash flow and balance sheet.
Barratt tells us it has been “paying our suppliers and sub‐contractors on time,” and that the 85% of employees in the process of being furloughed will be on normal pay at least until the end of May.
When it comes to picking my favourite companies during the FTSE 100 crash, that kind of ethics counts highly with me. It gives me assurance that a firm will behave well all the time, and I reckon that’s one of the best routes to long-term success.
Meanwhile, Taylor Wimpey (LSE: TW) shares are down 47% during the FTSE 100 crash. That puts them on a trailing price-to-earnings of only six. Forecasts don’t make much sense right now, as we could easily be looking at a full quarter of lost business. And that has not been fully accounted for.
I’ll try to put it into some kind of perspective, with a little guesswork. Suppose Taylor Wimpey’s earnings per share this year come in 25% below last year’s. That would still give us a forward P/E of only around eight. And that’s probably only about half of what I’d consider a fair valuation.
Of course, things could turn out worse than that, if the pandemic leads to an extended FTSE 100 crash. But at times like this, I reckon we really shouldn’t be worrying about this year’s figures at all. We should surely be looking for companies with great long-term potential, and with the kind of strong balance sheets that will see them through the crisis.
Cash to beat the crash
Taylor Wimpey scores very highly on that score, being very strongly cash generative. And I really can see Taylor Wimpey’s long-term dividend trend being nicely progressive, whatever happens in the short term.
Turning back to Barratt, we’re looking at a very similar trailing P/E to Taylor Wimpey’s, at a little over six. Again, that looks seriously undervalued to me, even though we’re in the midst of a FTSE 100 crash.
My Motley Fool colleague Peter Stephens has pointed out that the house building industry is facing further uncertainty even without the coronavirus pandemic. But he adds that “now could be a good time to capitalise on the sector’s weak near-term outlook through buying shares in Taylor Wimpey.”
I agree, and I think the same about Barratt Developments. The great British housing shortage will still be with us long after this virus has gone.
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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.