Persimmon - never wrong to book a profit, but beware a premature exit

Wednesday, 4th November 2015 12:20 - by David Harbage

Media comments last week suggesting a housing 'bubble' (notably in London prices), followed by this Monday's Sell recommendation from broker Liberium on the three FTSE100 house builders, has prompted market makers to mark down stock prices across the sector.

Given the share price gains seen in the likes of Barratt Developments, Persimmon and Taylor Wimpey in 2015, active traders may be switching out of these stocks to reinvest into areas of the market that may have been unloved, perhaps such as mega cap oil and financials. In the expectation that the trade can be beneficially reversed in a few days or weeks. While the logic of this might appeal in the short term - based on an expectation that asset prices have been overbought or oversold - there is a risk that the fundamental case remains unchanged, and that other investors swiftly move in to the vacuum caused by short term traders. 

Essentially, the short term weakness proves to be just that and a wish to own builders over the longer term - for instance, as a proxy for owning property - could be thwarted, if share prices bounce back quickly. In considering shorter term or speculative trading activity (to take advantage of an unexpected or other price movement that would seem to be temporary), private investors must have a clear strategy of how and when they intend to act, as well as consider the cost of transactions. Having a realistic perspective on one's ability to execute such a plan is critical; too often psychological and emotive factors (such as becoming too greedy) can undermine sensible intent.

Back to house builders, the Financial Times today leads with 'England needs 1.5m homes in five years' and national volume builder Persimmon announced its third quarter trading update for the period to 3 November. The first reiterates the need to provide more homes to a fast growing population; something all politicians agree on, most recently aided by the prospect of easing in local planning consents via HMG's National Planning Policy Framework. Affordability does not appear to be an insurmountable hurdle given recent evidence of higher wages, disposable income and dull wider economic conditions keeping any possible hike in interest rates in 2016 to a cosmetic touch.

Persimmon's report maintains the positive 'bottom-up' news flow and encouraging forward looking perspective from industry participants. Notably, the sales rate over the past ten weeks being 12% ahead and visitor numbers 5% higher than last year; opening 105 new housing developments and new regional centres in Stockton and Castle Bromwich since 1 July. By contrast with some analysts' concerns re a squeeze on profit margins, Persimmon management indicate further progress on the 20.5% achieved in the first half of 2015. Driven by both cost efficiencies and uplifts in selling prices. Land replenishment is not being flagged as a major obstacle to the business model: 16,000+ plots have been acquired this year, with 25% coming from their strategic land bank.

Importantly, by contrast with past mixed experiences of the housing cycle, the major builders are not over extending themselves in financial terms. Persimmon expects its year-end cash balance to be ahead of the £378m with which it began 2015. Investors in all the FTSE350 builders have been promised higher payouts, which has been a useful means of instilling financial discipline.

On this day 5 years ago Persimmon shares were 350p, 3 years ago 800p and a year ago 1450p. The company's track record of total shareholder returns is even more impressive - given the normal dividends and special payments made over recent years. So it is not surprising that opportunistic calls to take profits or reduce positions (issued by Credit Suisse last month and JP Morgan Cazenove last week) are seen. However, until the consensus of broker forecasts on future earnings are showing a decline, longer term investors in the sector can ride out any turbulence in share prices.

For what it is worth, there are 12 readily seen estimates of Persimmon's immediate prospects: EPS is due to rise 26% this year to 156.8p and 9.5% to 171.7p in 2016. In PE rating terms, Persimmon is the most expensive of its peers (due to its track record, size and liquidity) but the shares are still on a discount to the wider UK equity market. By reference to the dividend, a 99.6p likely pay-out in 2015 equates to 5% and the 109p forecast for next year would represent an income yield of 5.5%.

It is never wrong to take some profit 'off the table', and investors should always ensure that they are not overly exposed to one particular company investment or sector of industry. Having said that, long term investors - and especially those with income as a core objective - might regret exiting Persimmon or the relatively strong trading momentum (especially compared to most other business activities) evident in domestic house builders.

Written by David Harbage for lse.co.uk on the 4th Novemeber 2015

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The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.