Over the past year, the Persimmon (LSE:PSN) share price has fallen by 45%. Even over the past few months, the trend has been lower. As one of the UK’s largest homebuilders, I get why it has struggled to perform in the current climate. Yet as the property sector looks to get back on it’s feet, is there clear value in Persimmon right now?
A headache in housing
The sharp drawdown in the share price over the past year has come for several reasons. Traditionally, property stocks are cyclical in nature. This means that during economic boom periods they do well, but during slumps and recessions perform badly. Given that UK economic growth over the past few quarters has been virtually non-existent, it has hurt the performance of Persimmon and others in the industry.
Not only this, but the steep rise in interest rates has pushed mortgages rates significantly higher. Earlier this week, the average two-year fixed mortgage rate hit close to 6%! This is a problem for Persimmon because it means that some people simply can’t afford to buy new houses. It also hampers the market in general because buying and selling dries up.
Therefore, it hasn’t been surprising to see Persimmon underperform, with the stock not far away from its lowest price in the past decade.
Value starting to appear
The fall in price is one thing, but if it has been accompanied by falling earnings, technically the stock isn’t undervalued. This is the premise of the price-to-earnings ratio. A ratio below 10 is the usual barometer for an undervalued stock in my opinion.
For Persimmon, the ratio is just 4.73! This has been helped because even though profit fell in 2022, it still reported a very respectable profit before tax of £730.8m. Given the low price but decent earnings, the ratio has fallen to a very low level. In my books this makes the company undervalued.
Some will flag up the fact that in the latest trading update, new home completions for Q1 2023 were down 42% versus the same quarter last year. This is true, but let’s note two things.
The business’s private average selling price on completions was up 10% on Q1 2022 and up 4% on Q4 2022. So less is being sold, but at a higher price.
The other point worth noting is that sales might be down, but this has been forecast from late last year. Put another way, the share price already reflects the fact that completions are due to be lower for 2023.
Not for the faint-hearted
A risk is that we still have another year (or more) to go of economic uncertainty, high rates and property underperformance.
This could force the stock lower still. Yet I believe it’s already at an attractive level, so feel that using pound-cost-averaging makes sense. Buying some stock now and then purchasing more over the coming year should help to reduce risk and provide a good long-term set-up.
This post was originally published on Motley Fool
