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Persimmon (LSE:PSN) shares are among the worst performers on the FTSE 100 over the past 12 months. The stock has fallen 15.8% over the period, meaning a £1,000 investment then would be worth just £842 today.
However, during this time, I would have received 80p per share in the form of dividends. As such, today I’d expect to have a little over £900, reflecting a smaller net loss somewhere in the region of 10%.
Going forward
Housebuilders are certainly struggling in the current environment. That’s highlighted by the Persimmon share price, which is trading just above a decade-low reached earlier this year.
It can certainly be tempting to buy a stock trading at a low of this type, especially when it operates in a cyclical industry like housing. After all, we’ve seen the sector crash and recover in the past. However, the current scenario is unique considering where we’ve been over the last decade.
Housebuilders are struggling to maintain sales volumes without cutting prices, primarily due to the impact of higher mortgage rates, while the end of the help-to-buy scheme in March is a huge challenge.
There are many forecasts for the UK housing market and a lot of them will be wildly incorrect. It all comes down to affordability, which in turn is impacted by interest rates and state support.
Looking at the medium term, there should be a tailwind in the form of moderating interest rates. When interest rates are lower, it becomes more affordable for individuals to finance their home purchases, as monthly mortgage payments are reduced.
Worth the risk?
Persimmon has traditionally traded at a premium to the sector due to the previously achieved higher gross margins on its land bank, in turn driving improved returns. Currently, the housebuilder trades at just four times 2022 earnings.
This figure, however, belies the performance issues experienced in 2023. Analysts expect earnings per shares (EPS) to come in at 77p for the year. This means a forward P/E of 14 times. Looking further forward, analysts anticipate EPS of 89p in 2024 and 109p in 2025.
While these forecasts are informative, it’s worth recognising that they’re subject to change based on movements in interest rates, economic growth, and state support for the sector.
In turn, these earnings forecasts, which are less than half the 247p achieved in 2022, have contributed to falling price targets. The average price target is now £12.94 — that’s 27% above the current share price.
So, is it worth the risk?
Investors don’t just focus on the short term, like the next year. Looking at the bigger picture, and recognising the serious shortage of housing in the UK, it’s likely demand will pick up even if market conditions aren’t ideal. This viewpoint was also expressed by Persimmon CEO Darren Finch during the H1 earnings call.
While it may take some time, I expect to see the industry recover over the medium term. However, given the near-term concerns, my exposure to the housing sector centres on Vistry. This is because Vistry has a division that builds affordable homes for local councils, which offers some protection from problems in the private housing market.
