FTSE 250 housebuilder Crest Nicholson Holdings (LSE: CRST) operates in the southern half of England, and the firm makes an interesting alternative investment proposition to its bigger FTSE 100 rivals, Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW).
Room to grow
One argument for buying into smaller outfits on the stock market is that such firms have room to grow and can trounce the performance of their lumbering big-company competitors. However, we need to balance that theory against the advantages a big firm can bring to a market with enhanced financial clout and network efficiencies, a situation with particular relevance in the housebuilding sector perhaps.
That said, we can’t argue about Crest Nicholson’s impressive interim results released today. Housing revenue is up 29% on the year-ago figure, operating profit margins up 60 basis points at 19.1% and earnings per share up 51%. The firm says it achieved additions to both short-term and strategic land pipelines with the overall value up 22% at £10.1 billion. Forward sales are up 26% and the firm hiked the interim dividend by 56% — there’s no doubt about it, Crest Nicholson is flying!
A fertile environment for growing houses
All housebuilders find the macro-economic environment and structural characteristics of the housing market to be beneficial right now. Crest Nicholson’s chief executive reckons sustained demand for new homes underpins strong sales rates. Improving economic circumstances and a clear outcome in the General Election provide a good operating backdrop for the sector and give the firm confidence to increase its volume target. The business, he says, is well positioned to continue on its growth trajectory, which he expects to generate strong returns for shareholders.
However, reading the outlook statements from most housebuilding firms we find a similar story, so where should we invest?
Where’s the value?
A quick survey of figures for each firm throws up these valuation indicators:
|
|
Share price |
P/E 2015 |
P/E 2016 |
Price to net asset value |
Net gearing |
|
Taylor Wimpey |
184p |
12.5 |
11 |
2.34 |
55% |
|
Persimmon |
1929p |
13 |
11.5 |
3 |
36% |
|
Crest Nicholson |
540p |
11.5 |
9.4 |
2.7 |
79% |
Crest Nicholson’s earnings multiples seem the most attractive although the firm is also the most aggressively geared.
What now?
Before plunging into the sector now, I’d argue the need to consider the cyclicality of the housebuilding trade. All these companies’ shares have already enjoyed a good run in the up-leg of the current macro-economic cycle. Cyclical shares can end up looking the most attractive on traditional valuation measures when they are at their most dangerous. However, the sector still seems to enjoy good momentum and there could be more to come for investors.