Shares of Taylor Wimpey (LSE: TW) opened a little higher this morning after the FTSE 100 housebuilder released a trading update. At 194p, they’re around the same level as just prior to last year’s EU referendum and 67% up on a low of 116p hit after the vote for Brexit.
Today’s update told us the UK housing market has remained positive, with consumer demand continuing to be robust. It said that while the company is “alert to potential political and economic risks,” it’s on track to meet full-year expectations.
Boom … and bust?
Management expects to deliver an increase on last year’s operating profit margin of 20.8%. For a volume builder, this margin is running at the boom end of the housing cycle, as is the company’s price-to-tangible book value of 2.1 times. A City consensus earnings per share (EPS) forecast of 19.13p gives an ‘undemanding’ price-to-earnings (P/E) ratio of 10.1 but with forecast earnings growth of 5.7%, the price-to-earnings growth (PEG) ratio of 1.8 is well to the expensive side of the PEG ‘fair value’ marker of one.
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Housebuilders have boomed since the financial crisis, with unprecedented low interest rates and specific support for the industry, notably via the government’s Help to Buy scheme. However, with consumer debt at record levels and interest rates rising, I feel the housing cycle could begin to turn with anything less than further impactful support from the Chancellor in this month’s Budget.
Finally, I note that Taylor Wimpey directors sold shares to the tune of over £3m six weeks ago and that this has become something of a feature of housebuilder boardrooms in recent months. The company’s cyclically high profit metrics and valuation lead me to rate the stock a ‘sell’ and the tougher outlook for over-indebted consumers and boardroom share sales only buttress my view.
A Warren Buffett-type business?
I’m more optimistic about the valuation and outlook for Fuller, Smith and Turner (LSE: FSTA). While, Taylor Wimpey’s shares have recovered from the Brexit vote shock, the pub group’s haven’t. They reached an all-time high of over 1,200p a couple of years ago, but retreated to below 1,000p after the referendum and have continued to trade a little above and below that level (currently 985p).
Of course, the aforementioned tougher outlook for consumers also represents a headwind for Fullers, as do cost issues, including such factors as the impact of the National Living Wage and the introduction of the Apprenticeship Levy. However, the depressed share price seems to factor in these issues. I see potential for surprise good news in the Budget (for example, on beer duty) but, more importantly, with its focus on London and a superb estate of rare and valuable properties, Fuller remains a great proxy for the long-term dynamism and wealth-generation of the capital city.
This positioning, together with the superb management of the company, has delivered decades of value for shareholders, including over 70 years of rising dividends. With forecast EPS of 62.2p, giving a P/E of 15.8, and an immensely-covered 20p dividend providing a 2% yield, I’m reminded of Warren Buffett’s advice: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” This is certainly a company I’d be happy to buy a slice of today.
