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Taylor Wimpey results: House builders find a floor - shares begin to rally

By David Burrows

10:38, 4 August 2022

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In this article:
BDEV
Barratt
4.110 USD
0.04 +1.000%
BWY
Bellway
19.57 USD
0.07 +0.360%
CRST
Crest Nicholson
2.328 USD
-0.027 -1.170%
TW.
Taylor Wimpey
1.056 USD
0.011 +1.060%

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Taylor Wimpey homes in Newcastle, UK. Photo: Shutterstock
UK house builders have seen their share prices bounce back this month. Photo: Shutterstock

As an investor, just how do you play the house building sector? On the one hand you have a government pledge to build 300,000 houses a year to try and satisfy a huge demand for new homes.

On the other hand, you have interest rates on the rise and a looming recession that could choke house-buying interest.  

Is the sector really set for a hiding or is the supply/demand equation still in its favour?

There has certainly been a sell-off in the sector, consider the fact that Countryside Properties (CSP)  (-35%); Barratt Developments (BDEV) (-35%); Persimmon (PSN.L)(-34%) Bellway (BWY) (-29%): Taylor Wimpey (-28%) and Crest Nicholson (CRST) (-26%) are all down significantly year to date.  

 And yet when you look at Taylor Wimpey’s (TW.)  results this week, there are many positives.  

Taylor Wimpey share price chart

As Russ Mould, investment director at AJ Bell points out first half results from Taylor Wimpey were impressive, no question about it.

“To be guiding toward profit at the top end of consensus forecasts, despite facing challenges around surging raw material costs, shortages of skilled workers and lingering supply chain issues, is no mean feat”.

“Unlike some of its peers, Taylor Wimpey is on track to hit volume targets and, like a gazelle eluding a hungry lion, house price growth somehow continues to outpace inflationary and interest rate pressures for now.”

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House builders sell-off

Mould suggests the way the housebuilders have been sold off in 2022, with Taylor Wimpey among them, suggests the market reckons they can’t win this race forever.

“This seems a logical position to take,” he says. “Rising mortgage costs and other pressures on household finances are very likely to hit demand. This could shake the foundations of the housebuilding sector but, unlike before the Great Financial Crisis 15 years ago, those foundations are at least built on relatively sold ground.”

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Mould explains that Taylor Wimpey is not alone in having a strong balance sheet and it has invested in land at attractive prices.

“This, plus the long-standing supply and demand imbalance in the UK housing market, provides at least some confidence in the long-term outlook.”

So, for investors taking a long-term view (and that is typically the mantra from portfolio managers) an oversold housebuilder sector could offer a good entry (or re-entry) point.

House builders rally

To some degree that has happened already. While it has generally been a torrid year, all the house builders’ shares have rallied in the past month.

For instance, Countryside Properties up 22%; Barratt up 9%; Persimmon up 2%; Crest Nicholson up 14% and Taylor Wimpey up 11%.  But without exception, all these stock prices are significantly below pre-pandemic levels – so the monthly bounce back is not huge.

As for the reason for the bounce, perhaps the negative sentiment has been overdone and investors think the downturn may be less severe than expected?

Brokers currently are relatively positive on the sector - Marketbeat consensus of analysts sentiment, rates Taylor Wimpey a ‘buy’; Crest Nicholson and Barratt Developments ‘moderate buy’  and Persimmon and Countryside Properties a ‘hold’.

Looking ahead, the supply equation is certainly not going to change any time soon; the question is will potential buyers postpone any house moves until the economic picture brightens?   

 For the share investor it could be a case of taking some short-term pain with an eye on long-term gain. Alternatively, there is always the hedge option to short the sector.  

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