The share price of FTSE 100 housebuilder Barratt Developments (LSE: BDEV) is up 34% so far this year, compared to a gain of 9% for the blue-chip FTSE 100 index.
Barratt has outperformed over longer periods too. Over the last five years, its stock has delivered a 63% gain compared to a rise of just 6% for the FTSE. In addition, the big housebuilder currently offers a dividend yield of 7.6%, compared to 4.5% for the FTSE.
However, the BDEV share price dipped this morning when the company published its 2019 results, despite another year of record profits. Are the shares still a buy, or is it time to take a more cautious view?
Top numbers
Barratt completed 17,857 homes last year, an increase of 1.6%. The group’s pre-tax profit rose by 8.9% to £909.8m, while the shareholder dividend will rise 5.9% to 46.4p.
The profit margin on each home sold is also improving. Today’s numbers show the group’s operating margin rose by 1.2% to 18.9% last year. Management says it’s been able to offset the impact of rising costs with new designs and more modern methods of construction.
Customers seem happy too. Barratt is the only large housebuilder to have achieved a five-star rating in the Home Builders Federation customer satisfaction survey in each of the last 10 years.
Digging deeper
Housebuilding is a simple business. You buy some land, get planning permission and then build houses on the land you’ve bought. As cash comes in from home sales, you use this money to pay your bills and buy more land.
The tricky bit is to make sure you don’t end up with too much land or too many half-built houses when the market slumps. If this happens, you can find you run short of cash.
Barratt’s latest accounts show a net cash balance of £765.7m. This suggests it should have a comfortable safety buffer in the event of a slowdown.
However, one liability that’s not reflected in this calculation is the money the company owes to land creditors. These are the owners of land Barratt has bought, but not yet paid for. Today’s figures show it owes them £960.7m.
If we count this liability as a debt, then Barratt has net debt of about £195m, rather than net cash. This is a modest amount unlikely to cause a problem in most scenarios.
However, recent economic data have flagged up a slowdown in the UK’s services and manufacturing sectors. In my view, the risk of a slowdown is growing. I think Barratt should be doing more to reduce the amount it owes to land creditors, even if it means slower dividend growth.
Are the shares cheap?
Using the popular price/earnings ratio, Barratt stock looks cheap, with a forecast P/E of 8.8. The shares also look a tempting buy for income, with a yield of 7.3%.
However, the group’s net tangible asset value — its land, cash and inventory — is just £3,960.8m, or 389p per share. At today’s share price of 605p, Barratt stock trade at nearly 1.6 times its tangible net asset value.
In my opinion, that valuation depends on continued bumper profits from strong sales and the Help to Buy scheme. I think the shares look fully valued at current levels. I’m not in any rush to buy.
