Top FTSE 100 housebuilder Persimmon (LSE: PSN) released a trading update this morning in which it said it continued to experience healthy customer demand for new homes through the autumn sales season. It advised: “We anticipate our pre-tax profits for the year will be modestly ahead of market consensus.”
Despite this, and the company also reporting strong free cash generation for the year, the shares are down over 1% at 2,710p. There was little on the outlook for the current year beyond management saying it remains “mindful of market risks, including those associated with the uncertainty arising from the UK leaving the EU.” It added that it’ll update on its assessment of the housing market over the early weeks of 2018 in its results on 27 February.
Cyclical shift
Housebuilders’ profits and cash rewards for directors and shareholders have been pumped up by the steroids of low interest rates, the Help to Buy scheme and other favourable government policies. The stimulus is at a peak, as interest rates are now moving into a rising cycle.
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City analysts are expecting Persimmon’s profit growth to moderate rapidly in 2018 to mid-singledigits. Erring on the side of generosity, I reckon we’re looking at a forward price-to-earnings (P/E) ratio of a bit above 10 and a price-to-earnings growth (PEG) ratio of two, which is well above the PEG fair value marker of one. With the stock also trading at a peak cycle price-to-book ratio of 3.1, I believe now could be an opportune time to sell.
Downward slide
In contrast to Persimmon’s spectacular profits growth of recent years, the earnings of J Sainsbury (LSE: SBRY) have been on a downward slide. And as the company’s policy is to return half its earnings to shareholders in dividends, investors have seen multi-year annual dividend cuts.
Following a 17.3p payout for its financial year ended March 2014, Sainsbury’s board slashed the dividend by 24% for fiscal 2015. This was followed by an 8% cut for 2016 and a 16% for fiscal 2017. According to the consensus analyst forecast on the company’s website, shareholders can brace themselves for a further 6% cut to 9.6p for the current financial year.
Unconvinced
Sainsbury’s abysmal record of falling profits and annual dividend cuts makes it understandable that it had to do something to fight back against changing shopping habits and the relentless rise of discount chains Aldi and Lidl.
However, I’m less convinced by the merits of its acquisition of Argos than by Tesco‘s takeover of food wholesaler Booker and Morrisons‘ development of a number of wholesale supply partnerships, including with Amazon and McColl’s. For one thing, I see greater execution risk for Sainsbury’s with integrating Argos. And, for another, its increased exposure to discretionary consumer spending is not really what I’m looking for in a defensive sector like food.
Sainsbury’s is forecast to return to earnings and dividend growth (of around 10%) in fiscal 2019. At a share price of 246p, the prospective P/E is 11.5 and the forecast yield is 4.2%. Due to falling consumer confidence on the back of Brexit, belt-tightening as inflation runs ahead of wage increases, the company’s increased exposure to discretionary consumer spending and execution risk of integrating Argos, I view the current valuation as distinctly unappealing. As such, I rate the stock a ‘sell’.
