Is the Persimmon share price the biggest value trap in the FTSE 100?

Shares in FTSE 100 housebuilding giant Persimmon (LSE: PSN) rebounded this morning. That came just a day after suffering a near-5% share price fall on concerns over the quality of its houses and speculation its contract to sell properties under the government-funded Help-to-Buy scheme will be reconsidered.

Should Foolish investors give the £7.5bn-cap a wide berth, or regard recent scrutiny as a chance to build a position in a stock that continues to trade on what at least appears to be a seriously cheap valuation? 

I’m still inclined to say the former, despite today’s clearly excellent set of full-year numbers.

Profit jump

Total revenue rose 4% to £3.74bn in 2018 while recording a 13% jump in pre-tax profit to £1.09bn. The number of legal completions also rose last year — by 2.5% to 16,449.

Factor in higher operating margins and a small increase in capital employed and those already holding will surely be breathing a sigh of relief. 

No doubt in response to recent controversy, newly-appointed CEO Dave Jenkinson was keen to say he would be “implementing a number of necessary new initiatives in customer care,” in addition to maintaining the company’s current momentum. Early reaction to the former has apparently been “encouraging.“

With regard to Persimmon’s outlook, its new leader said sales were currently “in line with management expectations” and that — despite concerns over the health of the UK economy going forward — the company anticipated “delivering a similar level of legal completions during 2019 as in the prior year.”  

The elephant in the room

Trading on just nine times earnings before this morning and boasting a trailing dividend yield of over 9.7% (based on a total payout of 235p per share for 2018), Persimmon looks a tempting buy for both value and income investors.

Those who hanker for bulletproof balance sheets might also be interested. While 20% lower than at the end of the previous year, the firm still has a huge net cash position of £1.05bn in December.  

However, I remain wary. When its considered that roughly half of all the homes built by the company in 2018 were sold via the Help-to-Buy scheme, any changes could have a material impact on the company. Whether the government will be sufficiently appeased by Persimmon’s response is open to debate. 

Moreover, I still need to be convinced that the company has adjusted its pay for those at the top. This is, after all, the company that allowed its former CEO to walk away with a £75m bonus last year. Top quality management should clearly be incentivised but this award was beyond the pale, regardless of how successful Persimmon had been in recent years.    

All this before we’ve even introduced the dreaded ‘B’ word into the equation. 

Personally, I’ll be continuing to avoid any housebuilder over the next few weeks and months, regardless of whether or not Theresa May actually manages to get MPs to favour her final version of the deal.

Bottom line

Is Persimmon the biggest value trap in the FTSE 100? Perhaps not. At a time when some constituents are struggling to grow profits and just cover their payouts to shareholders, awarding this dubious accolade to the housebuilder seems extreme.

Nevertheless, I continue to believe that there are far less risky opportunities for generating income elsewhere in the market.