Image source: Getty Images
It has been a mixed few years for homebuilders. Khaki (LSE:PSN). Last year's revenues and profits were the lowest in years. The dividend per share was barely a quarter of what it had been a couple of years earlier. It is no surprise, then, that Persimmon's share price has fallen by 20% over the past five years.
In fact, until recently the fall was much worse, but the stock has been recovering easily and has risen in level. 30% since the beginning of May.
Given that the homebuilding sector appears to be more positive than it has been in recent times, could the stock still be a cheap addition to my portfolio even after that jump?
Demand growth potential
Optimism is easy to understand.
In the UK, the housing shortage has meant that there has long been an opportunity to build large volumes of new homes. This issue has moved to the top of the political agenda this year. Coupled with a more attractive interest rate outlook than we have seen at times in recent years, this could help boost demand.
On the supply side, Persimmon could benefit. It is a well-run company that has historically been among the most profitable listed housebuilders.
Created with TradingView
This is not a coincidence, but rather a design.
Persimmon has been an innovator in its field and has a vertically integrated business model. It seeks to maximise its own financial profit from the homes it builds and sells, as well as delivering efficiencies to the business. With the prospect of a stronger property market in the coming years, that model is set to prove its worth once again.
Room for possible further growth
How well could the company perform?
It is currently trading at a price-to-earnings (P/E) ratio of 21. I consider this a high value for a cyclical and sometimes very unpredictable market such as the home construction market.
On the other hand, if the company manages to match its strongest core earnings per share of recent years again, the forward-looking price-earnings ratio will be only about seven. If a housing boom means it does even better, that forward-looking valuation could be even cheaper.
Furthermore, if business is doing well, I expect the dividend to increase. Persimmon has historically paid generous dividends. Although it did cut its dividend several years ago, I thought it prudent to do so when earnings fell.
Created with TradingView
If earnings rise again in the future, as I believe they will, I expect the board to review the dividend level and I would not be surprised to see a significant increase.
Potential for continued increase in share price
Given the improved business outlook and what that could mean for earnings (basic earnings per share in the first half were already slightly higher than the same period last year), I see scope for Persimmon's share price to grow further from here.
However, I still see risks as it is unclear whether the political ambition to increase housebuilding will translate into increased demand for Persimmon.
A weak economy continues to cast a shadow over the property market, so I do not plan to buy Persimmon shares for my portfolio for now.
