Yesterday, the Savills (LSE:SVS) share price jumped 7.7%. This boost now means that shares have risen by an impressive 62% over the past year. With UK property stocks in vogue at the moment with a strong domestic property market, are Savills shares the pick of the bunch? Or after such a strong run, am I better off trying to find more undervalued options?
A boost from half-year results
The reason for the move in the Savills share price this week was positive half-year results. On the top line, revenue grew by 18% to £932.6m. Group profit before tax was up an impressive £56.1m, although the H1 2020 profit of £7.7m was clearly impacted by the pandemic.
Even with the good results, it was noted that “travel restrictions still represent an obstacle to cross-border capital deployment”. In less fancy terms, it seems that people are still holding back on buying property abroad. So if restrictions ease into the second half of the year, there could be even further scope for growth if this particular area of business picks up.
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Savills operates in 70 countries, so isn’t just focused on the UK. However, its UK market is significant and showed great growth during the period monitored. For example, UK residential transaction profit came in at £20.5m, up from £1.6m a year before.
The Savills share price jumped on these results. However, I do think that some of this positivity needs to be tempered. After all, we’re comparing it year-on-year to a terrible H1 2020. So it’s easy to beat that growth when comparing it to that period.
Good value in the Savills share price?
After the bump higher yesterday in the share price, it currently trades around 1,210p. This is close to the all-time high at the daily close of 1,258p last year. So clearly, the price is elevated. But what about relative value?
One metric I can look at is the price-to-earnings ratio. This compares the share price to the last reported earnings. The lower the figure, often the better value the company is for a potential shareholder to buy. At the moment, the Savills P/E ratio is 26.
In comparison, the FTSE 250 average P/E ratio is just below 25. So it looks fairly priced even with the share price gains. What about in relation to a competitor? For example, the Rightmove P/E ratio is 41. Although the business models aren’t exactly the same, they operate in the same sector.
Based on the above, I don’t have concerns about the Savills share price being overvalued after the release of its results. However, the outlook going forward could be less positive.
As I mentioned earlier, the UK market is a big area for Savills. The impact of the stamp duty holiday finishing could be significant. Add into the mix potential interest rate hikes next year, which could mean higher mortgage repayments. Both could be negative for revenues at the company.
On the other hand, I do think it makes sense to have exposure to property stocks in my portfolio. Given the valuation, I think that Savills is one of the best ways to achieve this. So on balance, I would look to allocate some money towards buying Savills shares now.
