Sunday, February 13, 2005
Are housebuilders due a market re-rating?
Theres a load of ways to value a company's shares. Discounted cash-flow and net enterprise value are two of the more scientific and unwieldy. The most common approach is the price:earnings ratio, the market value of a company divided by the profit generated in a year. PE ratios are normally calculated using broker forecast profits. The lower the PE ratio, the better value being offered, each share being backed by a higher proportion of profit.
Companies across a sector normally trade on similar PE ratios but better or worse prospects are normally reflected in a higher, or lower PE respectively. Shares in different sectors will trade at different ratings as each sector's risks are measured against the other. In the UK, the banking sector trades at a PE ratio around double that of housebuilding where fears of an imminent crippling recession have stymied enthusiasm in the shares.
An investor needs the savvy and awareness that builders will always look much cheaper than banks. The risks faced by each industry are very different. Though a bank may be cheap on a PE ratio of ten or eleven, a builder won't unless its shares are going for four or five times earnings.
In his column in today's Sunday Times, John Waples muses on whether the builders really should trade at such a discount to banks and the rest of the market. If companies like Ben Bailey (my largest shareholding) can maintain profitability in a housing downturn or at least provide evidence that they could, demand for shares in the sector would rocket:
HOUSEBUILDERS are used to being the City’s lepers. Investors have given them a wide berth and have been unable to spot that under the bandages the disease is not as virulent as feared.
As a result, institutions have called the housing cycle about as badly as they could. When the sector was roaring two years ago, housing stocks were as cheap as chips. Now, when every new survey is predicting a further slowdown in prices, building stocks are hitting all-time highs.
It appears that ahead of the sector’s reporting season, investors are realising these companies have real assets, make good profits and their rating has been handicapped by an Armageddon valuation. On top of this, January sales have been strong.
Take Persimmon, the £2.2 billion housebuilder that is on the verge of entering the FTSE 100. It is due to make profits of £469m, yet trades on a prospective p/e of only seven times. Rob Griffiths of Arden Partners said that Wimpey was trading on a p/e of only five times and Barratt on 5.5 times. He said when this occurred in America it was followed by a rerating that pushed average p/e ratios up to eight or nine times....
Buy ahead of the results season, but remember that institutional enthusiasm for this sector is often shortlived.
In March builders will be scrapping for attention like stags in rutting season.The market's reaction will make or break my 2005.
The Artful Dodger
Companies across a sector normally trade on similar PE ratios but better or worse prospects are normally reflected in a higher, or lower PE respectively. Shares in different sectors will trade at different ratings as each sector's risks are measured against the other. In the UK, the banking sector trades at a PE ratio around double that of housebuilding where fears of an imminent crippling recession have stymied enthusiasm in the shares.
An investor needs the savvy and awareness that builders will always look much cheaper than banks. The risks faced by each industry are very different. Though a bank may be cheap on a PE ratio of ten or eleven, a builder won't unless its shares are going for four or five times earnings.
In his column in today's Sunday Times, John Waples muses on whether the builders really should trade at such a discount to banks and the rest of the market. If companies like Ben Bailey (my largest shareholding) can maintain profitability in a housing downturn or at least provide evidence that they could, demand for shares in the sector would rocket:
HOUSEBUILDERS are used to being the City’s lepers. Investors have given them a wide berth and have been unable to spot that under the bandages the disease is not as virulent as feared.
As a result, institutions have called the housing cycle about as badly as they could. When the sector was roaring two years ago, housing stocks were as cheap as chips. Now, when every new survey is predicting a further slowdown in prices, building stocks are hitting all-time highs.
It appears that ahead of the sector’s reporting season, investors are realising these companies have real assets, make good profits and their rating has been handicapped by an Armageddon valuation. On top of this, January sales have been strong.
Take Persimmon, the £2.2 billion housebuilder that is on the verge of entering the FTSE 100. It is due to make profits of £469m, yet trades on a prospective p/e of only seven times. Rob Griffiths of Arden Partners said that Wimpey was trading on a p/e of only five times and Barratt on 5.5 times. He said when this occurred in America it was followed by a rerating that pushed average p/e ratios up to eight or nine times....
Buy ahead of the results season, but remember that institutional enthusiasm for this sector is often shortlived.
In March builders will be scrapping for attention like stags in rutting season.The market's reaction will make or break my 2005.
The Artful Dodger
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