Now below £10. Are Persimmon shares the bargain of the decade?

Having lost 70% of their value since February 2000, Persimmon shares are now the cheapest they have been in 10 years. Is this a buying opportunity?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young female business analyst looking at a graph chart while working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Betteridge’s law states that any headline that ends with a question mark can be answered ‘no’. But in this case, it’s wrong. I do think Persimmon (LSE:PSN) shares are the bargain of the decade. Here’s why.

A bargain stock is usually defined as one that doesn’t accurately reflect any of the underlying earnings, cash flow, assets, or debt of a company.

In the case of Persimmon, I think it’s undervalued using all four measures.

Should you invest £1,000 in Persimmon right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Persimmon made the list?

See the 6 stocks

1. Earnings

The directors are expecting 8,000-9,000 houses to be built this year. At the bottom end of this range, that’s just over half the average for the past five financial years (15,060).

Last year, the profit before tax per completed property was around £68k. Even if this falls to £60k due to inflation and/or a reduction in the average selling price, I think earnings should be around £480m in 2023.

Let’s be even more pessimistic and reduce it to £55k. In this worst-case scenario, pre-tax profits should be around £440m.

This implies a price-to-earnings ratio of around seven compared to an average for the FTSE 100 of 10.

2. Cash flow

Due to its simple business model and funding structure, the company’s free cash flow should be similar to its post-tax profit.

Building 8,000 homes this year should therefore generate cash of around £400m.

Applying discounted cash flow techniques (spreadsheets are available online), and assuming 5% annual growth, a discount rate of 8% and a terminal value equal to seven times’ free cash flow, gives a valuation of £4.1bn.

Even with these very conservative assumptions, that’s 28% more than its current market cap of £3.2bn.

3. Assets

Unlike many large companies, Persimmon’s balance sheet is full of tangible (physical) assets — such as land, work in progress, and cash — whose value is easy to determine.

At 31 December 2022, net assets per share were £10.77 – 11% more than the current share price.

4. Debt

This is a straightforward metric on which to assess the company.

At the end of 2022 it had no borrowings.

There are very few debt-free companies around at the moment.

Good in theory

Irrespective of how undervalued the company’ stock looks on paper, its fortunes remain inextricably linked to the health of the UK housing market. Rapidly rising interest rates and the cost-of-living crisis have reduced disposable incomes and dented confidence.

But we have been here before — the housing market is notoriously cyclical. However, the desire of young adults to get on the property ladder remains undiminished. And, once the UK economy starts to grow again, I’m sure it will pick up quickly.

However, Persimmon’s falling share price — and that of other housebuilders — suggests that investors remain unconvinced that the bottom of the market has been reached.

Created with Highcharts 11.4.3Persimmon Plc PriceZoom1M3M6MYTD1Y5Y10YALL10 Jul 201815 Jul 2025Zoom ▾2019202020212022202320242025202020202022202220242024www.fool.co.uk

Also, as the 98th largest company in the FTSE 100, it’s in danger of being relegated at the next reshuffle. Some fund are only permitted to invest in Footsie stocks.

What next?

Shareholders in the company — like me — have had to endure a torrid time lately.

But for the reasons outlined above, I remain confident that investors will soon recognise that the company’s shares are in bargain territory and the price is therefore unlikely to remain below £10 for long.

If I had some spare cash, I’d take advantage and buy some more!

Should you invest £1,000 in Persimmon right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Persimmon made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Persimmon Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

Analysts have upgraded this FTSE 100 stock to Buy. What should investors do?

Associated British Foods shares have been uninspiring for some time. But is it finally time to consider buying the FTSE…

Read more »

Man changing battery on electric bicycle
Investing Articles

Prediction: in 12 months the sizzling National Grid share price could turn £10,000 into…

It's been another solid year for the National Grid share price and the dividend yield is decent too. So why…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

Up 185% in 3 years, why does the market love this FTSE 250 stock

Over the past three years, this stock has vastly outperformed the FTSE 250. Dr James Fox takes a closer look…

Read more »

A handsome mature bald bearded black man in a sunglasses and a fashionable blue or teal costume with a tie is standing in front of a wall made of striped wooden timbers and fastening a suit button
Investing Articles

Looking for growth, dividends, or value? These 3 ETFs could be smart ideas to consider

Exchange-traded funds (ETFs) provide a way for investors to spread risk without sacrificing the possibility of huge long-term returns.

Read more »

Happy couple showing relief at news
Investing Articles

Is the Rolls-Royce share price fast becoming a joke?

The FTSE 100 engineering titan has done brilliantly in recent years. But our writer wonders whether the Rolls-Royce share price…

Read more »

Middle-aged white male courier delivering boxes to young black lady
Investing Articles

Is there a ‘best age’ to start buying shares?

Christopher Ruane weighs some possible pros and cons of waiting to start buying shares for the first time, versus starting…

Read more »

piggy bank, searching with binoculars
Investing Articles

Is it time to look again at the FTSE 250’s worst performers?

Our writer considers the prospects for two of the worst-performing shares on the FTSE 250, with falls of at least…

Read more »

A handsome mature bald bearded black man in a sunglasses and a fashionable blue or teal costume with a tie is standing in front of a wall made of striped wooden timbers and fastening a suit button
Investing For Beginners

Down over 40% in the past year, I think investors should consider these value shares

Jon Smith points out two value shares that have fallen heavily over the past year but are starting to look…

Read more »