Persimmon’s (LSE: PSN) share price is down 30% from its 16 October 12-month traded high of £17.21.
A big drop like this could mean a firm is fundamentally worth less than it was before. Or it could signal a major bargain to be had.
I ran key valuation numbers and looked more closely at the core business to find out which is true here.
How does the operational background look?
The advent of Covid in 2019/20 hit the UK housing market hard. The subsequent rise in interest rates that pushed mortgages to 16-year highs made matters worse. And the resultant cost-of-living crisis added to housebuilders’ woes.
However, last year’s first cuts in benchmark UK interest rates since March 2020 flagged a possible turnaround in their fortunes. And another reduction was made earlier this month.
Moreover, the government remains committed to its pre-2024 election promise to build 1.5m new homes over five years.
A risk for Persimmon is the tax-raising October budget exacerbates the current cost-of-living crisis.
Is the core business healthy?
In its 14 January 2024 trading update, Persimmon delivered 10,664 homes, up 7% year on year, ahead of market expectations.
The average selling price of the properties was up 5% compared to 2023. And its order book increased 8% to £1.146bn.
Over the same period, the firm opened 100 new sales outlets, bringing up the total to 270.
Given these numbers, it expects full-year 2024 underlying profit before tax to be at the upper end of its previous £349m-£390m guidance.
It also predicts a 14% underlying operating margin, in line with previous guidance.
Consensus analysts’ forecasts are that Persimmon’s earnings will increase 16.9% a year to the end of 2027.
And it is this growth that ultimately drives a firm’s share price and dividend higher over time.
What’s the current dividend and projections?
In 2023, Persimmon paid a total dividend of 60p. On the current share price of £12.02, it gives a yield of 5%. This compares very favourably to the FTSE 100 average of 3.5%.
However, analysts forecast the dividend will rise to 65.2p in 2025, 71.5p in 2026, and 80.2p in 2027.
These would give respective yields on the present share price of 5.4%, 5.9% and 6.7%.
Are the shares undervalued?
Persimmon trades at a price-to-earnings ratio of 15.3 against a peer average of 24.6. So it is a bargain on this measure.
However, it looks overvalued on its 1.2 price-to-book ratio compared to the 0.8 average of its competitors. This also applies to its 1.4 price-to-sales ratio against its peer average of 1.2.
A discounted cash flow analysis using other analysts’ figures and my own shows Persimmon shares are 45% undervalued at their current £12.02 price. So, their fair value is technically £21.85, although market vagaries could push them lower or higher.
Will I buy the stock?
Aged over 50, I am in the later part of my investment cycle. So, I do not want to wait for stocks to recover from any price shocks.
I think Persimmon’s earnings growth will power its share price and dividend much higher over time.
However, I do not rule out a short-term dip if the government continues to raise taxes and then fails to meet its housebuilding targets.
Therefore, this share is not for me right now.
This post was originally published on Motley Fool
