Taylor Wimpey (LSE:TW) is a UK-based residential homebuilder, specialising in everything from apartments to six-bed houses. The Taylor Wimpey share price is down 23% in the past year, currently trading at 122p. I don’t currently own any homebuilders in my portfolio, so should I add this potentially cheap stock? Let’s take a closer look.
What’s going on in the housing market?
Beside its balance sheet, much of the company’s value can be assessed from a glance at the state of the housing market.Â
The building society Nationwide announced in April that house price growth in the UK was beginning to slow down. Between April and the previous month, prices grew by just 0.3%, the lowest since September. Nationwide said this was a quicker slowdown than originally anticipated.Â
In response, however, Taylor Wimpey stated that it was still benefiting from a fluid housing market in the UK. Furthermore, it is targeting operating margins of between 21% and 22% in 2022.
It also paid a total dividend of 8.58p per share in 2021 and is progressing with a £150m share buyback scheme. Both policies are attractive to me, as a potential investor, because it indicates that the firm could be in a comfortable financial state and could be a source of income.
However, how long can the current housing market sustain itself? Interest rates are already at 1% and will likely rise further. This could deter potential homeowners.
In addition, the cost-of-living crisis, rising energy prices, and inflation, could all suggest that the housing market is starting to decline. This may be bad news for Taylor Wimpey.
A strong financial position and potentially cheap
On the other hand, a look at the firm’s balance sheet indicates that it is in a sound financial position. It rebounded swiftly after the pandemic. For 2020, the company reported a pre-tax profit of £264m. By 2021, this had risen to £679m.
For the three months to 31 March, the business also had net debt of £111m. This is well-covered by its cash balance, which stands at £921m. Its order book in April also stood just shy of £3bn.
There is also the possibility that Taylor Wimpey shares are cheap. By using forward price-to-earnings (P/E) ratios, that divide the share price by forecast earnings, the company has a ratio of 6.62.
A major competitor, Persimmon, has a forward P/E ratio of 8.1. Taylor Wimpey’s lower ratio may be an indication that the share price is currently cheap. It is encouraging to know that I might be getting a bargain if I bought shares now.
Overall, this is a company that is in a good state of financial health. If there was more predictability around the UK housing market, I might be tempted to buy shares in Taylor Wimpey.
However, I think the road ahead could be bumpy over the long term, as potential homeowners feel the pinch from short-term factors, like inflation. Despite the low forward P/E ratio and potential cheapness, I won’t be purchasing shares any time soon.