The Persimmon (LSE: PSN) share price has slumped badly in the last couple of years — you don’t need me to tell you that. Barratt Developments (LSE: BDEV) is down too, though not as hard.
But these are stocks in a sector that’s sure to enjoy strong long-term demand in the years ahead, aren’t they?
Value comparison
The businesses of these two are close to identical, and I don’t see any specific problems with either. So how might we decide which is better to buy right now?
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I’ll start by comparing their financial valuations. Here’s a look at a few key measures from the two firms:
| Measure/Company | Persimmon | Barratt |
| Recent share price | 1,096p | 424p |
| 1-year change | -38% | -10% |
| 5-year change | -56% | -20% |
| Price-to-earnings ratio | 12.6 | 6.8 |
| Dividend yield | 5.7% | 8.6% |
| Market cap | £3.5bn | £4.1bn |
Those are some hefty share price falls. But we have just had the biggest average house price drop since 2009.
Mortgage pain is hurting. And inflation had pushed up prices for building materials. That means margins are under pressure, and builders’ profits look set to suffer.
Gloomy headlines
But when I read the headlines, I see people wailing about house prices set to fall 25% in the next five years due to high interest rates. Or 35%, or whatever.
Do we think inflation and interest rates will stay this high for five years? I don’t.
Only this week, Ocado told us it thinks the UK is “definitely over the worst” of food price inflation. And food makes up a big chunk of the total.
I think the pain is likely to be fairly short-term. And the long-term demand for homes just can’t go away, can it?
I just don’t think the share valuations of these two fairly represent the long-term profits they’re likely to make. Like any time a sector is down, I’d say share prices have dropped too far.
Stock valuations
On the figures above, the valuations of the two look quite different.
The Persimmon P/E of 12.8 might seem a bit high, but forecasts show it dropping to nine by 2025. In the other direction, Barratt’s low P/E of 6.8 looks set to rise to 10.
There’s a difference in dividend yields too. But Persimmon’s has already been cut. And the City expects the Barratt yield to fall next year, to 4.8%.
On these measures, based on the outlook for the next three years, both stocks look similarly valued.
Which is best?
Forecasts are extra risky in times like these. And yes, mortgage costs could hurt the market more over the next two or three years. So I wouldn’t be surprised to see share prices fall further before things improve.
But you know, when house prices fall, land prices should too. So in the long term, I expect margins to recover, and earnings and dividends to keep going.
I bought Persimmon shares, but I think I’d be just as happy with Barratt Developments. Or Taylor Wimpey, or…
