Can the Persimmon share price go any lower?

The Persimmon share price has slumped in 2022. Mortgage costs are steadily rising. And investors increasingly fear a housing slump.

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The Persimmon (LSE: PSN) share price has plunged 55% over the past 12 months.

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Housebuilder shares tend to be cyclical, and investors seem to tie their fortunes directly to house prices. But while sales volumes and selling prices do, of course, affect the bottom line, lower house prices are not the tragedy they might seem.

If prices fall, land prices are likely to drop too. In past downturns, we’ve seen housebuilders using their cash for topping up their land banks — and judging by first-half results, Persimmon has been doing that again. But rising materials, energy and labour costs make things different this time.

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Valuation

So a share price fall is to be expected. But is it overdone, and how much cheaper can Persimmon shares get?

Based on 2021 earnings, the shares are on a price-to-earnings (P/E) ratio of just 4.6.

And on today’s share price, the 235p total dividend paid in 2021 would provide a massive yield of 20%. If that continued, an investment today would fully repay itself, in cash, in just five years… and leave the buyer with the shares effectively for free.

But 110p of that dividend was a special, for the purpose of returning surplus capital to shareholders. And I don’t expect that to continue.

Forecasts

Forecasts are especially uncertain right now. So I’d place less confidence in them than I usually do.

But for 2022, analysts currently predict a forward P/E of 4.9. They expect earnings to fall, which is no surprise. Forecasts still suggest a 19% dividend yield, but I think that’s unlikely.

While forecasts are far from concrete, we do at least have the company’s first-half results to provide some backing. And yes, underlying earnings per share did fall, by 13% compared to the first half of 2021.

If we’re optimistic and think we’ll see only the same fall in the second half, that would suggest a forward P/E of only 5.3. That’s still not much more than a third of the FTSE 100‘s long-term level.

Pessimism?

Let’s be more pessimistic, and suggest a second-half earnings fall of twice that amount. If that happens, we’d still see a P/E of under six. How much worse would things need to get to make Persimmon shares look overvalued?

At the halfway stage, Persimmon was over 90% forward sold for the current year. And the firm restated its guidance for 14,500 to 15,000 completions for the full year.

This all makes Persimmon shares look like a screaming buy to me. But it does ignore one thing, and that’s the deepening economic crisis we’re suffering in the second half of the year. UK inflation is set to be among the developed world’s worst, and interest rates are climbing. Mortgage costs are soaring.

Risk

That pretty much identifies the risk. If inflation hammers the housing market, all these figures could be well off. Persimmon’s next trading update will be on 8 November. And I suspect the share price could fall even further before then.

But for long-term investors, I think I’m seeing an attractive buy at today’s price. Even if Persimmon slashes its dividend by 75%, we’d still have a healthy 5% yield.

Should you invest £1,000 in Genel Energy Plc 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 Genel Energy Plc 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.

Alan Oscroft has positions in Persimmon. 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.

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