The last three months have been a terrific period for the Bellway (LSE:BWY) share price. Since October, the stock has surged more than 40% as confidence returns to the real estate market. And looking at today’s (9 February) results, it seems this trend’s set to continue.
So is now the time to become a Bellway shareholder? Let’s explore.
Demand for housing’s back
With interest rates going through the roof over the last couple of years, mortgages have become increasingly unaffordable. Naturally, this has lowered demand, resulting in property prices slipping. That’s bad news for property developers like Bellway, who had previously been enjoying a booming housing market.
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Investors who haven’t been tracking the Bellway story may find its latest results unimpressive. After all, total revenue plummeted by 30.7% from a combination of fewer completions and lower average selling prices. And based on analyst forecasts, underlying earnings are on track to halve.
Yet despite what these figures suggest, Bellway’s performance was actually in line with internal expectations, as well as exceeding a few as well.
As previously mentioned, the cyclical housing market is in the process of having a downturn. But as of last September, mortgage rates started to drop as uncertainty surrounding interest rates fell. Providing this trend doesn’t reverse, it serves as an early indicator that the worst may be over. And these results seem to confirm this.
Total home completions came in at 4,092 versus expectations of 3,896. Meanwhile, the number of home enquiries from prospective customers started climbing again despite the winter period typically being quieter.
Further evidence of improved affordability and demand stems from the level of cancellations. A year ago, around 20% of homebuyers were cancelling orders. As of January, this has almost halved to 13%.
Therefore, management has reiterated its full-year guidance of achieving 7,500 home completions by July, expecting to return to growth in its next fiscal year. With both announcements matching expectations, it seems the boost in investor confidence over the last couple of months wasn’t misplaced. As such, the Bellway share price may be set to continue its upward trajectory.
Risks to consider
While the housing market seems to be on the mend, Bellway isn’t out of the woods yet. Even with mortgage rates falling, the homebuilder still lacks any significant pricing power to offset a sudden jump in cost inflation. And an attempt to do so could handicap management’s plans to return to growth.
This is particularly problematic since the tragic geopolitical conflict in Gaza has already started disrupting global trade routes. Should this translate into higher construction material prices, it will likely be a struggle to maintain profit margins.
The group’s net cash position has also shrunk considerably, from £292.5m to £77m. That’s certainly not ringing any alarm bells of being overleveraged. But it does suggest the group’s financial flexibility has shrunk. Sadly, without a full set of financial statements, it’s difficult to judge Bellway’s current health status accurately.
Time to buy?
All things considered, these results appear to point to one conclusion – Bellway’s getting back on track. Of course, it’s not the only homebuilder stock out there. And there are others similarly benefiting from the recovering economic landscape. But at a price-to-earnings ratio of just 9.6, it may be a bargain worth considering, in my opinion.
