According to data released by Interactive Investor about its clients’ preferences, the most bought FTSE 100 stock is Taylor Wimpey (LSE:TW.). This is based on trades between 1 January and 25 February, before the housebuilder announced its latest results.
On 27 February, the group reported 2024 completions (excluding joint ventures) of 9,972, compared to 10,356 in 2023. In 2025, it expects to sell 10,400-10,800 homes.
It sounds as though the housing market might be on the turn. But what’s a fair value for the company’s shares? Let’s take a look.
An old favourite
One of the most popular methods for assessing whether a stock offers good value is to use the price-to-earnings (P/E) ratio. A low number could be evidence of an undervalued company.
Based on a current (10 March) share price of 114p – and adjusted earnings per share (EPS) for 2024 of 8.4p — Taylor Wimpey’s presently trading on a multiple of 13.6 times its historic earnings.
Is this cheap? At first glance, it’s hard to tell.
Recent history
The table below shows its EPS for the past five years and its share price at close of trading on the day its annual results were announced. This data’s then used to calculated the P/E ratio at the time.
| Year | Adjusted EPS (pence) | Share price on results day (pence) | P/E ratio |
|---|---|---|---|
| 2020 | 6.5 | 180.5 | 27.8 |
| 2021 | 18.0 | 138.6 | 7.7 |
| 2022 | 19.8 | 116.8 | 5.9 |
| 2023 | 9.9 | 133.9 | 13.5 |
| 2024 | 8.4 | 112.0 | 13.3 |
The outcome is a range of 5.9-27.8. Apply this to the company’s 2024 earnings and it could be argued that a fair price for its shares is anywhere between 50p and 234p.
Such a large variation isn’t particularly useful, although it’s worth noting that the group’s shares are currently trading 20% below the mid-point.
Future growth
Looking further ahead, the consensus forecast of analysts is for EPS of 8.99p (2025), 10.58p (2026), and 12.07p (2027). This implies an impressive three-year average annual growth rate in earnings of 12.1%.
However, assuming this continued for the foreseeable future, it would be 2032 before EPS exceeded those of 2022. As a result of rising building costs, the industry’s no longer able to command the margins that it did previously. For example, in 2024, Taylor Wimpey’s operating margin was 12.2%, compared to 20.9% in 2022.
Even if completions return to previous levels, I think it will take a lot longer for margins to recover, if ever. Indeed, when announcing the company’s 2024 results, its chief executive warned that costs are still rising.
But assuming the 2027 forecast proves to be accurate, the forward earnings multiple drops below 10. The average for the FTSE 100’s around 15. On this basis, the shares appear attractive.
Another investment appraisal technique
Finally, let’s look at discounted future cash flows. Based on my calculations, this produces a fair value for the company of £6.72bn. This is equivalent to 191p a share, a 66% premium to today’s share price. It was last at this level in April 2021.
Although this technique is popular with many investors, including billionaire investor Warren Buffett, the results are highly sensitive to the assumptions being made. But even allowing for a large margin of error, the outcome does further support the idea that Taylor Wimpey’s shares are undervalued at the moment, even if it’s difficult to determine precisely by how much.
That’s why long-term investors may want to consider adding the stock to their portfolios.
This post was originally published on Motley Fool
