Since May, the share prices of a number of FTSE 100 companies have come under pressure. Investors have become increasingly unsure about the outlook for the world economy, while Brexit may also be weighing on the stock market’s performance.
Housebuilder Taylor Wimpey (LSE: TW), for example, has declined by 20% in the last six months. Demand for housing, it is feared, could fall if the UK’s economic performance fails to improve. As a result of its decline, could the stock be worth buying alongside another faller that reported a positive trading update on Monday?
Improving outlook
The company in question is engineering services business Babcock (LSE: BAB). It reiterated its important supply arrangements with the Ministry of Defence, while also highlighting that it is on track to meet its financial guidance for the 2019 financial year. It continues to exit a number of small, low-margin businesses including the Appledore shipyard. It is also reshaping its oil and gas business, seeking to deliver growth.
The company continues to seek to reduce debt. It anticipates that its net debt-to-EBITDA ratio will be around 1.4 times by March 2019, and expected to fall to 1.1 times by March 2020.
Looking ahead, Babcock is forecast to post a rise in earnings of 2% this year, followed by further growth of 5% next year. It trades on a price-to-earnings (P/E) ratio of 7.3, which suggests that it offers a wide margin of safety at the present time. With demand for defence-related products and services expected to rise over the medium term as the industry benefits from an end to austerity, the outlook for the stock could improve.
Fundamental strength
The fundamentals of the housing market continue to be strong, and this could lead to a successful recovery for the Taylor Wimpey share price. Interest rates are expected to remain low, and it is seemingly unlikely that the Bank of England will risk a more hawkish monetary policy at a time when the UK is undergoing major political and economic change. This could help to keep mortgage availability high, and may lead to rising house prices over the coming years.
With the government’s Help to Buy and stamp duty relief policies helping to drive demand for new-build properties higher, the performance of UK housebuilders may surprise the stock market. Taylor Wimpey has been reporting robust demand for its properties, and this trend could continue, due in part to an imbalance between demand and supply which has worsened over the last few decades.
With the company’s share price having fallen by 20% in six months, it now has a P/E ratio of around 7.8. This suggests that it could offer strong long-term growth potential, with the prospect of an upward re-rating, alongside growing earnings, set to drive the company’s valuation higher. Although it may take time for it to realise its full valuation potential, the stock seems to have value investing appeal.
