Thursday, 23 March 2017

Why UK Homebuilders look like bad value...

The UK home builders seem cheap on a trailing P/E basis all valued around 8-11x P/E. But there is a reason for these relatively low valuations and that is the cyclical nature of the businesses. The stocks are all posting record earnings (except Bovis) at the moment boosted by the UK housing market growth which in turn is driven by (in order of importance):

(1) Cheap money (funny how the media never mentions this)
(2) Economic growth and low unemployment
(3) Lack of available housing (due to planning + empty/2nd homes + speculation driven by (1))

Now with all housing affordability metrics at record unaffordable levels, interest rates on the floor and peak employment it seems like cyclically things can only go one way from here. That would be down.

So we are at peak cycle from the look of the data. Maybe not this year, maybe not next year, but soon enough the housing market will take a wobble in the UK and these guys are vulnerable. Data is great for these companies as there are lots to choose from and all have been around at least 10 years. 2016 reported Earnings are way above the 10 year or even 5 year averages:

UK Homebuilders Earnings Per Share - (Bovis estimated; 2016)
This means you are paying more than 20x 10 year average earnings to own these stocks today (except TW who have negative 10 year average earnings). Even on an 8 year average basis only Bovis trades below 20x;

Share price performance has been limited over a ten year period as this fully captures the massive effect of the last crisis on the homebuilders (TW never really recovered) and then the boom to date:

However the 5 year chart shows you where the returns have been, nothing like some government subsidies and a wall of cheap money to drive demand and keep your land bank appreciating;

Caveat Emptor for these shares.

I will do a more in depth analysis soon on this sector.

Disclosure: Disclosure: I have a small short position in Persimmon Plc. These are opinions only, not investment advice. If in doubt read my disclaimer.

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