A mild share price dip encouraged me to pile back into housing giant Barratt Developments (LSE: BDEV) late last week, the stock having shed 7% of its value from May’s 14-month peaks of 615p per share to the levels of last Friday.
While the uncertain UK economic outlook has prompted many share pickers to cash out of the housebuilders, I consider the London firm to be on much stronger foundations than many of Britain’s blue-chips, and particularly the FTSE 100’s UK-focused banks like Lloyds (LSE: LLOY).
Safe signals
The latest trading statement from Barratt certainly suggests that investors have been hasty in hitting the sell button in recent weeks.
The London-based builder advised last month that it expects a “strong market backdrop“ to help profits meet the top end of current expectations of between £675m and £733m in the year to June 2017.
“Market conditions remain good, with the group delivering a strong performance since the start of the calendar year,” the company noted. It added that “increased competition within the mortgage market has resulted in wide availability of attractive mortgage finance which, alongside Help to Buy, continues to support the very strong consumer demand.”
Barratt said it remains on track to sign-off 17,350 completions in the outgoing fiscal period, the largest number of completions for nine years.
And in a promising signal of future demand, the firm noted that total forward sales in the period from January 1 to May 7 clocked in at £3.21bn, up 12.7% year-on-year and representing an all-time high.
Growth story remains intact
Look, those still expecting the earth-shaking earnings growth of yesteryear are bound to be disappointed. The economic pressures created by falling real wage growth, the uncertainties created by ongoing Brexit negotiations on buyer appetite, and lower buy-to-let demand, are all expected to water down the explosive home price growth of prior years.
Indeed, the City expects Barratt — which saw earnings rise by double- or even triple-digit percentages in recent periods — to print a 6% bottom-line advance in the year to June 2017. And growth is expected to slow still further, to 4%, in fiscal 2018.
But I believe the builder’s earnings profile in the medium-to-long term remains on much more stable footing than Lloyds, for instance.
The Black Horse Bank is expected to record a 141% earnings rise in 2017 by City analysts, but to follow this up with a 3% fall next year. Not only does the business face the problems brought on by stagnating economic growth, not to mention increased competition in key areas like mortgages, but the expensive PPI scandal is also scheduled to keep running until 2019.
Better bang for your buck
Besides, Barratt also offers much better value for money than Lloyds. While the housing star’s forward P/E ratio of 9.8 times matches the bank’s corresponding reading, Barratt really trumps its Footsie colleague in the dividend stakes. The company sports a 7% yield for the present period, beating Lloyds’ reading of 5.8%. And Barratt’s 7.2% yield for next year also surpasses the bank’s corresponding 6.6% figure.
I believe that Lloyds’ ultra-low valuations are a just reflection of its shaky investment outlook. But the same cannot be said for Barratt, in my opinion, which I believe remains grossly undervalued. Indeed, I expect the country’s chronic supply/demand imbalance to continue delivering juicy shareholder returns well into the next decade.
