Persimmon’s (LSE: PSN) share price is down 30% from its 16 October 12-month traded high of £17.21.
A big drop like this could mean a firm is fundamentally worth less than it was before. Or it could signal a major bargain to be had.
I ran key valuation numbers and looked more closely at the core business to find out which is true here.
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How does the operational background look?
The advent of Covid in 2019/20 hit the UK housing market hard. The subsequent rise in interest rates that pushed mortgages to 16-year highs made matters worse. And the resultant cost-of-living crisis added to housebuilders’ woes.
However, last year’s first cuts in benchmark UK interest rates since March 2020 flagged a possible turnaround in their fortunes. And another reduction was made earlier this month.
Moreover, the government remains committed to its pre-2024 election promise to build 1.5m new homes over five years.
A risk for Persimmon is the tax-raising October budget exacerbates the current cost-of-living crisis.
Is the core business healthy?
In its 14 January 2024 trading update, Persimmon delivered 10,664 homes, up 7% year on year, ahead of market expectations.
The average selling price of the properties was up 5% compared to 2023. And its order book increased 8% to £1.146bn.
Over the same period, the firm opened 100 new sales outlets, bringing up the total to 270.
Given these numbers, it expects full-year 2024 underlying profit before tax to be at the upper end of its previous £349m-£390m guidance.
It also predicts a 14% underlying operating margin, in line with previous guidance.
Consensus analysts’ forecasts are that Persimmon’s earnings will increase 16.9% a year to the end of 2027.
And it is this growth that ultimately drives a firm’s share price and dividend higher over time.
What’s the current dividend and projections?
In 2023, Persimmon paid a total dividend of 60p. On the current share price of £12.02, it gives a yield of 5%. This compares very favourably to the FTSE 100 average of 3.5%.
However, analysts forecast the dividend will rise to 65.2p in 2025, 71.5p in 2026, and 80.2p in 2027.
These would give respective yields on the present share price of 5.4%, 5.9% and 6.7%.
Are the shares undervalued?
Persimmon trades at a price-to-earnings ratio of 15.3 against a peer average of 24.6. So it is a bargain on this measure.
However, it looks overvalued on its 1.2 price-to-book ratio compared to the 0.8 average of its competitors. This also applies to its 1.4 price-to-sales ratio against its peer average of 1.2.
A discounted cash flow analysis using other analysts’ figures and my own shows Persimmon shares are 45% undervalued at their current £12.02 price. So, their fair value is technically £21.85, although market vagaries could push them lower or higher.
Will I buy the stock?
Aged over 50, I am in the later part of my investment cycle. So, I do not want to wait for stocks to recover from any price shocks.
I think Persimmon’s earnings growth will power its share price and dividend much higher over time.
However, I do not rule out a short-term dip if the government continues to raise taxes and then fails to meet its housebuilding targets.
Therefore, this share is not for me right now.
