Barratt: Long-Term Investors Could Buy Dips In This Leading Home Builder

Barratt: Long-Term Investors Could Buy Dips In This Leading Home Builder

Despite the economic uncertainties due to the pandemic, the UK housing market has remained robust over the past year. According to the Office For National Statistics:

“Recent price increases may reflect a range of factors, including pent-up demand, some possible changes in housing preferences since the pandemic and a response to the changes made to property transaction taxes across the nations.”

Global real estate group Savills further highlights:

“House prices grew by 2.1% in April… This was the strongest month-on-month increase since February 2004 and puts annual UK house price growth at 7.1%. House price growth is likely to reach double digits during the summer. Demand remains strong… But the supply of homes for sale has not kept pace with the level of demand.”

In fact, the demand for new homes across the UK is robust. At present the government has a target of 300,000 new homes annually. Therefore, today’s article looks at member home builder Barratt Developments (LON:) (OTC:). BDEV stock is up 16% year-to-date, and recently hit a 52-week high of 779.40p.

On June 3, the shares closed at 760p ($21.56 for US-based stock). The current stock price supports a dividend yield of almost 1%. Its market capitalization stands at £7.74 billion (or $10.92 billion).

Recent Metrics

The group’s history goes back to the early 1950s. It became listed on the London Stock Exchange in 1968.

Since then, Barratt has become the UK’s largest house builder, and holds the maximum 5-star rating in the new Home Builders Federation annual New Homes Customer Satisfaction Survey.

In early January, Barratt released robust for the six month period ended Dec. 31. Revenue was £2.5 billion (or $3.53 billion), up 10.1% year-on-year. Profit before tax was £430.2 million (or $606.7 million), up 1.7% YoY.

The trading update released on May 6 further showed robust numbers. Total forward sales were 14,846 homes, up 4.7% from 2019. In May 2020 and May 2019, comparable metrics had been 12,205 homes and 14,181 homes, respectively.

CEO David Thomas said:

“We have seen strong demand for our high quality, energy efficient homes on well-designed developments which means we now expect to increase wholly owned completions to between 16,000 and 16,250 homes this year.”

Investors were pleased to hear that Barratt completed more homes and sold them at higher prices. Following the trading update, a number of analysts have upgrading earnings forecasts for this year and next. BDEV stock’s forward P/E and P/S ratios are 10.40 and 2.14, respectively.

Bottom Line

A booming market in the UK has meant strong gains for BDEV stock, one of the strongest names among home builders. However, given how far it has advanced in the past year, short-term profit-taking could easily be in the cards.

We should also remind potential investors that along with increases in commodity prices, building costs have also been rising. In other words, there could be supply-chain issues affecting profit margins.

Therefore, we would side with curbing enthusiasm and wait for a pullback before buying into the share price. A potential decline toward the 730p level or below would improve the margin of safety. In February 2020, BDEV shares were over 870p.

Therefore, further fundamental strength could easily push the price back to those levels in the coming quarters. Given the importance of the housing sector for the UK economy and the number of new homes needed each year, Barratt has significant potential to increase both revenues and earnings.

On a final note, just as in the UK, the past year also has been a strong year for the US housing market. Those investors who believe the long-term strength in housing in the US is likely to continue in the second half of the year could also consider investing in ETFs that focus on US home builders. Examples include:

  • iShares U.S. Home Construction ETF (NYSE:) – up 25.3% YTD;
  • SPDR® S&P Homebuilders ETF (NYSE:) – up 27.1% YTD.

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