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FFO,
While i agree with you on the DCF front, theoretically, I think it’s pretty ridiculous to assume that you, me or even Buffett can make accurate an accurate DCF, especially with housebuilders… interest rates, corporation tax, residential development tax, stamp duty holidays, material cost inflation, skilled labour shortages and so on…. Good luck inputting accurate data into your DCF. I’ll continue using a p/e on underlying earnings. To summarise, nobody knows what a business is truly worth. My concern is what price I’m buying at, and what I’m likely to be able to sell at. That’s all that matters. Them city boys in London love DCF models and EV/EBITDA etc, yet with huge salaries, bonuses, long shifts, copious amounts of Peruvian coffee (and something else that’s grown around that part of the world), and extremely expensive kit on their desk, they barely beat the S & P 500. I’ve never had such a problem and all I have at my disposal is a kettle, mug, pen, notepad and an ageing smart phone
DarkEnergy (something that really fascinates my mind),
I wouldn’t expect it to remain static at £25, but I think that’s a realistic ceiling (I’m always conservative in my valuations though). £25 will be the new £30, if you will, due to the tax increases. I have a better grasp on what I believe the ceiling to be for BWY though, as I’ve done much more research there. On a p/e basis, 11 seems to be the historic limit. Likewise, it doesn’t seem to exceed a p/b of 2 in a bull market. What’s interesting, however, is that in the past, this would give a narrow range of valuations, whereas today, the difference equates to around £9 per share. Might not sound like a lot, but that’s £1.1bn, or almost 50% of the current market cap. I’ll sell at the lower of the two, if I’m still holding BWY. I imagine I’ll own PSN as well on the way up
FFO,
Of course just looking at P/B is an oversimplification, but I’d much rather have assets than not, especially at a time like this. After all, owning assets is the very foundation of investing, is it not? Money = numbers on a screen. In a real crisis, say, the collapse of the British pound, what would you rather own? Land and houses, or cash during a time of hyper-inflation? An extreme example, but as I’m 30, the USD is nearing the end of its life, and govt debt is becoming very difficult to service, I might live to see it, although I expect the USD to be replaced with a Fed-issued digital coin before this arises (a new form of the gold standard). Book value limits downside, and with HB earnings and share prices only heading one way, that’s what I’m focusing on. In a bull market, I agree, it’ll mean very little (the data proves this), but look at what’s happened so far… PSN is down 70% from the recent peak, whilst BWY is down 47% . Btw, I’m assuming that BWY will convert some of that inventory into cash and there is always the option to borrow, as the company is so asset rich
I fail to understand why they made such a decision though with what was on the horizon with the economy. Also, I thought the idea of buying assets in distress was so that they could be acquired on the cheap. Neither of CRL’s were particularly cheap. Then they gambled on the share price (in regards to the payments structure) which was costly. A real shambles, especially considering that Emma Hardy is a luxury brand, and we were potentially on the brink of a recession. The management team are usually exceptional, imo, but I’ll never understand their logic with the acquisitions. It seems like they were desperate to add some revenue growth and reach their targets, but by ignoring the obvious, they’ve hindered progress. It looks like CRL are over the worst in terms of inflation, I’ll agree with that, but the interest rate increases are going to hinder progress moving forward. Another year of stagnation ahead I think. Long-term potential remains, assuming that the CEO doesn’t retire and doesn’t waste a small fortune again
It looks like another there’s another painful year ahead with interest rates likely to continue rising and cost inflation remaining high. As demonstrated by the decrease in revenue, CRL have failed to pass on these additional costs to some of their customers.
The timing and payment structure in relation to acquisitions looks worse as time elapses. This stands out to me from the preliminary results: ‘A 1% increase in bank base rates would reduce Group pre-tax profits by £114,000 (2022: £75,000)’. I think it’s highly likely that we’ll continue to see the BoE increase interest rate rates for the foreseeable future, thus I can’t see a return to net profit on FY24. Once again we’re told that the full benefit of the acquisitions is to be felt soon, but I am starting to have doubts about them
Several of you on here have stated that you believe that PSN will be worth £30 per share once the housing market has recovered. Can one of you please show me how you’ve arrived at this conclusion, because I’d expect it to peak at £25 per share. I understand that the SP was over £30 recently, but that was before the residential development tax and wasn’t corporation tax 20% at the time?
Strictly,
Redrow and Bellway were almost on par. There’s no shame in timing things in a less than perfect way. Nobody has a crystal ball and it’s difficult to sit on the sidelines when you can clearly see significant upside in a stock. I restructured my portfolio completely today, so 20% of my portfolio is now in HB’s (11% in BWY, 9% in RDW). I’ll increase that to 30% if we see an SP capitulation or a surprisingly (at least to me) resilient housing market. Are you averaging down?
For me, once I see 100% upside in a stock with a < 3 year time horizon, I’m in. No ifs, buts or timing the market. Any drop from there and I simply buy more, so I welcome it with open arms. I personally won’t be paying too much attention to the next set of results as I don’t think they’ll offer much long-term insight, but it’ll be an interesting read for sure, especially when it comes to comparing and contrasting the resilience of each HB
Trump & Truimph,
Very good posts from you both, thank you. I think the questions to ask is ‘where would inflation be without the aggressive QE?’. Let’s just say, I don’t think the oil and food industries would be breaking records with their profit margins. Supply chain issues are only one piece of the puzzle imo. With all due respect Trump, when you say the BoE don’t have a clue, I think you’re very wrong (people make this same mistake when it comes to the govt). They know exactly what they’re doing, but imo, their objective isn’t simply reducing inflation. In fact, I think creating an high inflationary enviroment was an intentional economic strategy for many governments of the developed world (it’s what I would have done and exactly what I expected and warned my family about), because with interest rates close to zero in many developed countries, how else were we going to stimulate the economy during this short-term debt cycle? Moreover, we’re actually at the end of a long-term debt cycle (the biggest economic issue on the planet, yet you’ll rarely hear it mentioned on the news by the economic analysts). High inflation (asset price and cost) justifies higher interest rates, so that further down the line, we can reduce interest rates in order to stimulate the economy. This goes much, much deeper than the U.K. housing market. Furthermore, asset price inflation also gives the illusion of wealth creation; something that is incredibly important, psychologically. Boom-bust is the very nature of this economic system, although everybody seems surprised when each crash occurs. I digress slightly, but how was I, a mere mortal, able to foresee this inflation while the federal reserve believed that it would be transitory? They knew exactly what was going to happen, and they kept the printers going until their target was achieved imo, and I must admit, it was completely necessary. I often consider where GDP and asset prices would be now without the recent round of economic stimulus. Avoiding deflation will always be top of the agenda for central banks
Portfolio,
There’s no such thing as a ‘realistic mortgage rate’. It’s always relative the base rate, whatever that may be. Interest rates fell to zero before in order to stimulate the economy, and we’ll likely see them there again (or close to it) during the next decade if economic growth remains stagnant. A.I. seems to be the only thing that could kickstart our economy, but I wouldn’t bank on it
Portfolio,
No, not necessarily. There is a shortage out housing, and that’s been reflected in the price of housing in relation to household earnings for several decades. Paying 12% in the past is irrelevant. What matters is the relative increase in interest rates. For example, if the baseline rate was 11% for 10 years, a 1% increase wouldn’t cause a housing crash. However, if you think the baseline rate can go from zero to, say, 7% in a short period of time, with high cost inflation (primarily in food and energy), and there won’t be a serious correction in house prices, because of latent demand, then yes, you’re either in denial or in an asylum (said in jest, of course). There are mitigating factors though, with wage increases being a significant one; you’ve mentioned another. Note, that even if your theory is correct about buyers waiting on the sidelines, the result is the same: a decline in the sale of houses and a fall in house prices. Ironically, there was a 19% fall in house prices at the end of the 80’s to early 90’s (a 37% fall, adjusted for inflation), when ‘life went on’. House prices were much lower in relation to earnings back then as well, I believe? Are you expecting house prices to remain stagnant or increase over the next few years? Or do you expect a small correction? I think we’ll see a correction, but I don’t think the housing market will collapse, or anything like that. 16% of my portfolio is in housebuilders. I will make that 30% if my forecasts turn into reality. As I keep saying on here, if you’re invested now and you hold for several years, you’ll make some serious coin, so I’m no de-ramper, I just accept reality and that’s why I’m not sitting on a big loss right now, whereas others are… and those losses are likely to get much bigger imo. Also, the downside differs from one HB to another; something that I think is often overlooked
Avocet,
Who expected house prices to collapse during the pandemic? I certainly didn’t. People were forced to save money and the money supply sky rocketed, whilst interest rates remained at close to nil. We also had lots of people claiming furlough whilst working cash in hand, while others were committing fraud and pocketing tens of thousands in the process. There were additional factors as well. Today, people are being forced to spend, nobody is getting free handouts (or at least nobody who could afford to buy a house), interest rates are increasing at a pace and so on. I don’t mean this in a condescending way, but you should honestly do some more research into economics, and don’t listen to economic analysts, half of them are absolutely clueless. I highly recommend the books of Adam Smith and Ray Dalio
Strictly,
While I agree with completely in terms of ROE, I personally don’t apply that rule with PSN vs BWY, because imo, the only reason PSN has a higher ROE is due to the fact that they only have a few months of inventory on their books, whereas Bellway (the last time I checked) had something like 11 months of inventory. Were the companies to have the same level of inventory, then yes, I’d say that PSN is the better stock to own. I expect PSN to fall another 40% from here, with BWY falling, c.25%. This of course assumes that there is no government intervention and inflation remains stubborn. That said, from such a bottom, PSN will offer the most upside imo. Only then will I consider opening a position with PSN. I think a lot of investors are in denial about where we’re heading. I trimmed my housebuilders earlier this week and I’m moving to a more diversified portfolio now, so I can pivot effectively as certain stocks tank, while others rebound. Do you think BWY will be able to maintain a 5%+ dividend throughout this downturn? This is the question that’s preventing me from valuing it effectively at the moment. Also, you raised an incredibly valid point in another post regarding share price movement which I’m in full agreement with. Establishing what is going to happen with the housing market is one thing (I’m confident in my conclusions here, as house prices are dependant on the availability of cash and affordability & availability of credit), but trying to guess where the share price will go is, at least imo, impossible. I think some damning data will be released during the coming months though, so I’m willing to bet that we haven’t reached the bottom yet. That will occur when fear has peaked; and judging by the amount of denial I’m witnessing (true denial, e.g. ‘there’s a housing shortage, so prices won’t fall’), I don’t think we’re there yet. I can’t say I’m stressed though, as we all know how this ends for those of us who are still holding our shares in 3-5 years time
Tao,
I reassessed both CARD and my housebuilders earlier. The result was me trimming the HB’s, due to them likely having a significantly longer time horizon, and buying some CARD (7% of my portfolio; my smallest position). 70p is still the realistic bottom for me. At that price, or close to it, I’ll be buying aggressively. At £1.50 per share, I’ll sell every share
PageOfCups,
What’s the name of this company that you’re referring to? Or is this a hypothetical scenario?
Tao,
I fail to see how CARD is worth £1.80, even with growth forecasts, but I agree that it’s undervalued. £1.30-£1.50 is roughly where I’m thinking, but achieving fair value in this economic climate, with rising interest rates, isn’t a very realistic possibility imo. I think 70p-£1.10 is the range CARD will trade in over the next 12 months, but I think it’ll spend most of its time floating between 80p and £1. After the full year results, it could be a different story, however.
I am considering trimming my housebuilders and adding here though, as I think the recovery could be quicker for CF, and I can only see housebuilders going one way for the next year or 2… and it’s not up. I spoke to my Dad (DaMatser; he posts on here occasionally) yesterday and he’s got me asking some serious questions. The pen and paper will be out later
MrMark,
I own 6 stocks. Each of them offer over 100% upside. That’s why I don’t own CARD right now. It’s about relative value. Imo, CARD is the 7th or 8th best stock that I’m aware of. It’s a tough call, because the other stock offers global diversification, but they’re facing tougher headwinds than CARD. I’d likely buy both simultaneously. I wrote a detailed valuation of CF on here after the last results RNS. There’s plenty of upside here, assuming that earnings grow this year. My Dad has shares here and I actually told him the other day that if I was him, I’d be buying at these levels as he’s playing with much more money than I am, and due to his age, he has less time to financially recover from a significant loss. At 70p, I’ll be buying, 100%. If my other stocks rise significantly and this remains at 90p, I’ll be buying. I’ve bought the highs and sold the lows here since 2020, and publicly stated when I’ve done this. When I sold at £1.10ish recently, I was wrong to do so, according to some. Likewise, I was an idiot when I was buying at 30p
Alnwick,
While there’s obviously no debate between MOON and CARD, I can’t say I agree with you on CARD’s P/E. If you deduct last year’s one-off benefit of £3.5m, then apply a 25% tax rate, you’re talking c.£36.5m underlying net income for the year, which gives us a p/e of c.8.5. It’s still cheap, but a p/e of 7 today on underlying net income would give CF a market cap of £255m (74p per share). 70p is roughly where I’d consider a re-entry here, although it may never come, but I fully accept that I could miss out
Steve,
Lower income households are always hit the hardest by inflation as they have less disposable income and less savings to weather the storm. Food inflation (@ c.20%) is incredibly difficult to mitigate, because, well, it’s essential for survival and it equates to a much higher % of household income for lower income households. It’s well-documented that this demographic is struggling. I agree that those who are remortgaging are in trouble, especially those with low household income as they’re going to get hammered by both inflation and increased mortgage payments
Strictly and Panda,
Strictly, very valid point on PSN’s ROE. As I stated earlier, if all the housebuilders bottom out at a similar P/B, this will be the HB stock to own. However, I don’t think the higher ROE justifies the current premium on P/B. Like yourself, I’m invested in Redrow and Bellway. PSN is the only other HB in the debate for me. If the P/B gap closes, it’s highly like that I’ll also own all 3. I’m 50/50 atm. A big concern for me with PSN atm, is that they sell to the people who are being hit hardest by inflation. It’s the reason I’m 50/50, instead of being 60/40 in favour of BWY. What are your thoughts on this?
Panda, Bellway (for example), could stop building houses now and still match last year’s revenue with their inventory. Likewise, if they were to fall on hard times, they would be acquired (I imagine) on the strength of their balance sheet. The last time I checked, inventory was regarded as an asset. If those assets cost money to maintain, then that is a operating cost, is it not? The bottom line is this: if I wanted to buy a housebuilder and simply liquidate the company, I would be far better off buying Bellway right now than PSN. That suggests to me, that owning BWY is lower risk. Moreover, the SP is more tightly underpinned by book value. Would all of this matter during a housing market boom? No. Does it matter in relation to the current economic outlook? In my opinion, yes. If the market panics, I’m 99% sure that PSN will far by a greater magnitude than BWY, for the reasons I’ve mentioned. It’s your money though, I’m just telling you my perspective. Anybody who invests in either of these companies during the next 12 months is going to make a pretty penny. That’s all that matters
Stevebt,
That’s fine, but their competitors already have a huge inventory of houses to sell, which puts them in a favourable position. In the incredibly unlikely event of liquidation, where would you suffer the greater losses? If PSN had a huge inventory, would that not justify a higher market cap, or are assets completely irrelevant? My point was that the P/B is higher here due to lack of inventory, and I expect that this will eventually be addressed with a correction in the share price. If we assume that all housebuilders suspend their dividends next year, surely their P/B ratios will fall to a similar rate, assuming there’s not a monumental difference in earnings (both actual and forecasted). In fact, the lack of inventory (and consequent high P/B) was the main reason I swerved PSN in favour of alternatives. When a company can’t be valued on its earnings or, imo, excessive dividends, all attention is drawn to P/B, as seen during the last housing market correction. In a realistic worst case scenario, I think this could fall another 50%, compared to 30% with some of its competitors. That said, PSN would offer the most upside from there, upon recovery, based on earnings, so I’ll be adding it to my portfolio, should this occur