Friday, October 29, 2004
Ben Bailey: not sure I'm lichen developments
Housebuilders have delivered staggering returns to shareholders for the last four years. Falling interest rates, a national shortage of quality housing and strong employment combined to make the perfect climate for these businesses. Their market boomed and much hay was made.
Construction companies represent a sector where share price performance amongst each member is highly correlated. They labour or prosper under the premise each will suffer or savour market conditions simultaneously. Whatismore, they a price-takers, their goods sell at the price agreed when the customer walks into their Portakabin - there's no notion of output prices being fixed for months in advance as many manufacturers enjoy. Housebuilders have little pricing powere. Also, there is little scope for cost-cutting innovation, no real value in research - they are stuck with whatever the market serves.
Contrast to manufacturers, pharmaceuticals or retailers. These companies can enhance earnings via improved productivity, design or invention. In comparison, housebuilders are left to look like lichen, stuck where they happen to land - unable to fix anything about their surroundings and left to the mercy of the elements. A company such as Ford, however, is like the migrating songbird. In tough times they can escape to a warmer, more profitable environment and take their chances their, for example, producing more smaller, cheaper cars or even buck the market by introducing a new model which recaptures customers' excitement and credit agreements.
My lichen of particular interest is Ben Bailey. The share price has toiled following warnings on the climate being suffered by other builders such as Countryside and Countrywide. Following recent interest rate rises, media doomongering on the future of the UK housing market has depressed sentiment further. These revelations leave me wondering if Ben Bailey provides a good home for my money. Outlook is uncertain but valuations are undemanding. Recent results from housebuilder Westbury confirmed the sticky patch but reassured the market on the industry's prospects:
some uplift in the autumn market, although customers are generally taking longer to commit. It is clear that interest rate increases and comments from the Bank of England have moderated both demand and sales prices, resulting in a more stable and sustainable market...Overall the fundamentals for our industry remain sound with household formation continuing to outstrip supply. In the short term consumer confidence, which is influenced by wider economic and social factors, could inhibit demand. However we remain convinced of the sustainability of the UK housing market in the longer term.
No two lichen are the same. Some may weather adverse conditions better than others or be living on a different patio entirely. I'm still confident of the market Ben Bailey operates in. I trust the management to inform me if trading had turned significantly worse and finally, I hope the stock market will recognise how undervalued Ben Bailey is and the shares rise accordingly.
But it is the last of these three convictions I hold with the least confidence.
The Artful Dodger
Construction companies represent a sector where share price performance amongst each member is highly correlated. They labour or prosper under the premise each will suffer or savour market conditions simultaneously. Whatismore, they a price-takers, their goods sell at the price agreed when the customer walks into their Portakabin - there's no notion of output prices being fixed for months in advance as many manufacturers enjoy. Housebuilders have little pricing powere. Also, there is little scope for cost-cutting innovation, no real value in research - they are stuck with whatever the market serves.
Contrast to manufacturers, pharmaceuticals or retailers. These companies can enhance earnings via improved productivity, design or invention. In comparison, housebuilders are left to look like lichen, stuck where they happen to land - unable to fix anything about their surroundings and left to the mercy of the elements. A company such as Ford, however, is like the migrating songbird. In tough times they can escape to a warmer, more profitable environment and take their chances their, for example, producing more smaller, cheaper cars or even buck the market by introducing a new model which recaptures customers' excitement and credit agreements.
My lichen of particular interest is Ben Bailey. The share price has toiled following warnings on the climate being suffered by other builders such as Countryside and Countrywide. Following recent interest rate rises, media doomongering on the future of the UK housing market has depressed sentiment further. These revelations leave me wondering if Ben Bailey provides a good home for my money. Outlook is uncertain but valuations are undemanding. Recent results from housebuilder Westbury confirmed the sticky patch but reassured the market on the industry's prospects:
some uplift in the autumn market, although customers are generally taking longer to commit. It is clear that interest rate increases and comments from the Bank of England have moderated both demand and sales prices, resulting in a more stable and sustainable market...Overall the fundamentals for our industry remain sound with household formation continuing to outstrip supply. In the short term consumer confidence, which is influenced by wider economic and social factors, could inhibit demand. However we remain convinced of the sustainability of the UK housing market in the longer term.
No two lichen are the same. Some may weather adverse conditions better than others or be living on a different patio entirely. I'm still confident of the market Ben Bailey operates in. I trust the management to inform me if trading had turned significantly worse and finally, I hope the stock market will recognise how undervalued Ben Bailey is and the shares rise accordingly.
But it is the last of these three convictions I hold with the least confidence.
The Artful Dodger
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