Investors have remained cautious on housebuilders since the housing market reopened in June. But I think this sector may offer some opportunities. Today, I want to take a look at FTSE 100 member Barratt Developments (LSE: BDEV). Although the Barratt share price hasn’t moved much since May, I think this stock could be worth considering.
Strong government support
Despite this year’s crash, Barratt’s share price is still 75% higher than it was when the Help to Buy scheme was launched in April 2013.
Help to Buy has provided a long-running boost to housebuilders’ profits. And although this scheme is scheduled to become more restricted in 2021, and to end in 2023, my money would be on an extension.
In the meantime, the government has put in place a new measure to support house prices by suspending stamp duty on homes up to £500k until 31 March 2021.
Low interest rates and historically cheap mortgages have provided an additional boost to house prices in recent years.
Taken together, I think these factors provide significant support for housebuilders. Given how sensitive voters are to house prices, I think the government will be wary about making changes too quickly.
Strong trading despite Covid hit
Despite these tailwinds, coronavirus will obviously hit housebuilders’ profits this year. Lockdown prevented them building or selling many houses between April and June. Fears of a recession are now dampening hopes of a quick recovery.
The Barratt share price has fallen by more than 30% this year, as investors have priced in the risk of bad news. But unless the housing market really slumps, I think this sell-off may have gone far enough. I’m encouraged by the firm’s recent trading and can see some potential value in this stock.
Since reopening its sales centres in June, Barratt says it’s seen an average of 0.63 private reservations per outlet per week. That’s less than 10% below last year’s level of 0.69 per week.
In the circumstances, I think that’s a solid performance. I’m also encouraged by the relatively low level of cancellations the firm appears to have seen. Barratt’s order book at the end of June contained 14,326 homes, with a sale value of £3,249.7m. That’s around 25% higher than last year. However, given the number of home completions delayed by lockdown, I think it’s more sensible to view this as broadly unchanged from last year.
Is the Barratt share price cheap enough?
The risks of investing in housebuilders are pretty obvious. A serious housing market crash could cause sales to slump, leaving builders with unsold property and unpaid bills. Given this risk, I don’t think we should be paying too much for housebuilding stock.
Fortunately, I think Barratt’s share price is low enough to be worth considering. At around 500p, broker forecasts put the stock on about 11 times 2020’s reduced earnings, falling to a P/E of 10 for the 2021 financial year.
Despite the disruption to sales we’ve seen this year, the company still had net cash of £305m at the end of June. Management plans to repay government furlough payments and the firm is expected to restart dividends in 2021. Analysts expect a payout of 22p per share, giving the stock a forecast yield of 4.4%.
Barratt shares aren’t without risk. But I’d rate them a contrarian buy at current levels.
