FTSE 100 housebuilder Persimmon‘s (LSE: PSN) share price has seen some heavy selling pressure recently. Unfortunately, today’s fairly bullish trading update hasn’t done anything to arrest this decline. What’s going on?
Strong trading
It’s a fair question, particularly as Persimmon stated this morning that trading between the beginning of July to 8 November had been “strong“. It now expects a 10% rise in legal completions in 2021 over that achieved in the lockdown-heavy 2020. Average private new home reservations per site were approximately 16% ahead of (pre-pandemic) 2019 too. No wonder the FTSE 100 property juggernaut reflected that the housing market had taken recent changes to government schemes and the removal of the stamp duty holiday “in its stride“.
Aside from this, Persimmon expects margins to “remain resilient” even in the face of rising build costs. Despite planning delays, the company thinks interest in new developments from potential buyers and good mortgage availability should fuel further growth as well.
So, why is the Persimmon share price falling?
Despite this bullish update, the Persimmon share price was firmly lower this morning. Taking this fall into account, the company’s valuation has now fallen 16% in the last six months. It’s now 5% lower than where it stood 12 months ago.
The reasons behind this are probably numerous:
#1 Old-fashioned profit-taking: At the height of the Covid crash, the Persimmon share price fell very close to 1,600p. Anyone buying at this level would have enjoyed seeing their capital double in just 12 months. For a FTSE 100 company, that’s a stunning result. As such, I can’t blame anyone for simply wanting to bank some gains.
#2 Housing market has peaked: In the aftermath of the global pandemic, UK house prices have soared. With the arrival of the traditionally quieter winter trading period, however, it might be suggested that the market has peaked for now. And if interest rates do rise sooner than later, there’s no guarantee 2022 will be as good as Persimmon thinks.
#3 Supply chain issues: Despite stating that it had managed to navigate industry supply chain issues well, there’s a chance things could get worse before they get better. A shortage of materials may delay completions. This, in turn, could push more investors towards the exits.
Great opportunity?
Due to their cyclical nature, housebuilders rarely make it onto my share watchlist. I’ve also had an aversion to Persimmon since it awarded a former CEO a frankly ludicrous amount of money as he left the company. Nevertheless, it does score very well on my ‘quality’ checklist. Returns on capital and margins are high relative to peers (and the market as a whole).
Another potential attraction is the great income stream. Persimmon offers a staggering 8.9% forecast yield at today’s price. Then again, I note that expected profit may only just cover this payout. Should earnings slip unexpectedly, a dividend cut certainly isn’t out of the question.
Still, PSN does have a £895m in cash on its balance sheet. The stock is also reasonably priced on 11 times forecast earnings.
Stay diversified
While Persimmon’s share price performance over recent months has been disappointing, I don’t see any reason for holders to panic. Yes, the need to remain diversified is as important as ever. However, there’s still a lot to like here.
Is it time for me to change my mind on housebuilders and add one to my portfolio? Possibly.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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