While still dealing at a discount to its pre-referendum price, Taylor Wimpey (LSE: TW) has enjoyed a modest upswing in recent sessions. Indeed, the stock has risen 9% during the last month alone, and I believe the housebuilding giant has much further ground to gain.
Industry data following June’s Brexit vote was far from comforting, with signs of flagging homebuyer demand creating huge concern over the profitability of the housing sector as we move into 2017.
But surveys more recently have underlined the cheery outlook for the likes of Taylor Wimpey — just this week Halifax noted that average house price growth registered at 6% in November, speeding up from the 5.2% year-on-year improvement in the prior month.
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So although house price growth could slow in the coming months, Halifax advised that “very low mortgage rates and an ongoing, and acute, shortage of properties available for sale should help support price levels.”
With this homes shortfall set to persist long into the future, I reckon Taylor Wimpey certainly has plenty of scope for further share price gains, the firm providing terrific value for both growth and income investors.
Sure, the building behemoth is anticipated to endure a rare earnings fall in 2017 — a 4% decline is currently anticipated — but this results in a P/E ratio of just 8.9 times. Not only is this well below the FTSE 100 forward average of 15 times, but a sub-10 reading suggests the risks facing the housing market are more than priced-in at current levels.
And despite these predicted bottom-line pressures, Taylor Wimpey’s rosy long-term earnings picture and exceptional cash generation is predicted to propel the dividend to 13.8p per share in 2017 from an estimated 11.2p in the current period.
This yields a staggering 9%, taking out the British blue-chip average of 3.5% by some distance.
Bank in bother
Financial giant Royal Bank of Scotland (LSE: RBS) is another Footsie pick dealing at mouth-watering paper valuations, even in spite of recent share price advances — the bank has added 19% in value over the past month, taking it to levels not seen since late June.
But unlike in the case of Taylor Wimpey, I don’t buy into this renewed sense of optimism and expect a downturn in the UK economy to weigh on RBS’s already-weak revenues prospects.
The bank saw income edge 2% higher during January-September, to £8.9bn, and I believe the fruits of its long-running asset-shedding programme will put paid to any chance of heady top-line growth looking ahead, not to mention the fallout from the UK’s ongoing Brexit negotiations.
And this isn’t the only problem for RBS as the firm faces a rising PPI bill ahead of a touted 2019 claims deadline, not to mention questions over its weak capital ratio — recent Bank of England stress testing revealed a £2bn black hole on the bank’s balance sheet.
So I believe stock pickers should ignore the low P/E ratio of 13.1 times for 2017, particularly as current broker predictions for a 25% earnings rise are in danger of a colossal downgrade in the months to come.
