When I look for stocks to buy, I want companies with good long-term profit records. And I like them best when they’re out of favour and good value.
I’m wondering if Berkeley Group Holdings (LSE: BKG) might fit the bill. I do like the look of its H1 figures, just out on 8 December.
The market doesn’t seem to share my enthusiasm, and the share price is down a few percent as I write. It’s still up 25% so far in 2023, though.
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Strong performance
The housebuilder spoke of a “Strong performance, with profit guidance extended and shareholder returns maintained.“
That’s fine, but what do the figures actually say? In the six months to 31 October, we saw a rise in profit before tax compared to last year. Up 4.6%, it surprised me considering the pressure the property market faces right now.
Earnings per share came in 1% lower, which is neither here nor there really.
A key measure, the firm’s operating margin, was steady at 19.5%.
All about cash
For me, right now, it’s all about cash and liquidity. I rate that as the key essential for a company whose business faces uncertainty.
It’s true for banks, for example. And despite the economic pressures, their liquidity is still almost as strong as I can remember seeing it.
And back to the building business, I really don’t see any problems at Berkeley Group. Net cash grew to £422m, and total liquidity stood at £1.6bn.
The firm undertook £64.5m in share buybacks in the period. That’s down on the £110.5m from the previous year, but I still think it’s very positive.
And dividend payments in the half nearly trebled, to £63.1m.
How’s the outlook?
Berkeley has extended its guidance by a year, and now expects at least £1.5bn of pre-tax profit in the three years to 2026. Previous guidance had it at £1.05bn in two years.
The board also says its on track for £283m in new shareholder returns by 30 September 2024.
All this sounds good for the long term, but I can’t gloss over the risks.
First, we’re hearing of the mortgage market easing up. But I can’t put aside the fear that we haven’t yet seen the full impact of the interest rate rises of these past two years. Economic lag can be quite long.
Valuation
My other thought is about how much of the future potential is already in the share valuation now.
A year ago, before Berkeley shares started climbing back, I’d have rated the stock as close to a no-brainer buy.
But today, we’re looking at a forecast price-to-earnings (P/E) ratio of 13.5, with earnings expected to be flat for the next three years. I think that could be close to fully valued.
Any kind of wobble, and I could see the share price falling again.
Still, that’s in the short term. This one is still very much on my candidates list for my next buy.
