2024’s been a rollercoaster of a year for FTSE 100 stock, Vistry Group (LSE:VTY). The homebuilder enjoyed an impressive rally over the first nine months, rising by over 40%. Yet in the last three months, all this progress has been undone, with share prices taking a nosedive in October before continuing on a downward trajectory.
As a result, the stock‘s down 30% since January, bringing its forward price-to-earnings (P/E) ratio to just 6.6. Therefore, the business is starting to creep into bargain-buying territory.
But is this actually a good investment or a value trap? Let’s dig into the details and determine whether investors should consider or avoid this enterprise.
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Homebuilding’s getting expensive
Within the homebuilding sector, most companies have been focused on expanding the number of houses sold on the open market. Vistry opted for a different tactic, focusing on building out new partnerships.
By selling to registered and private rented sector providers, management has kept its revenue growth in double-digit territory. And with home completions on the rise, while peer slashed targets, everything seemed to be moving in the right direction for this business.
Then, seemingly out of nowhere, a profit warning came. And then another. Two profit warnings later, the stock had seen half of its market-cap wiped out in less than two months. What happened?
Sadly, management’s very bullish view of its business resulted in a significant underestimation of construction costs. In particular, the group’s operations in the southern region of the UK (roughly 300 sites) proved far more expensive than anticipated, triggering an independent review.
As such, full-year guidance for pre-tax profits was slashed by £80m to £350m. Then, a few weeks later, this target was dropped once again to £300m, with further guidance of higher costs and more inflation inbound during 2025. Pairing that with the missed target of lifting the balance sheet to a net cash position, it’s not surprising that investors began selling en masse.
Hopes of a rebound?
With the damage now done and the stock now trading below its average P/E multiple, is this secretly a buying opportunity for long-term investors?
The independent review resulted in a projected additional hit to pre-tax profits of £20m in 2025 and £5m in 2026. However, it also revealed no systemic issues across its various divisions. In other words, the underestimated cost of building homes appears to be the only major problem.
Meanwhile, management’s still signing new partnerships and joint ventures, keeping its construction pipeline full of growth potential for the next decade. Having said that, this isn’t a business I’m rushing to buy right now. Home buying activity remains suppressed due to the higher cost of mortgages. And even among registered providers, demand appears to be tapering.
This isn’t the first time Vistry has had to navigate through cyclical downturns. However, management’s going to have to do a lot of convincing to get investors back on their side. That’s why I’m looking elsewhere for potential buying opportunities.
