Due to the potential investment opportunities available within the UK market, I often find it helpful to use a filter to scan the FTSE 100. This allows me to quickly identify companies that meet my criteria without wasting time on shares that don’t align with my investment objectives.
I have decided to compare each FTSE 100 company’s price-to-earnings (P/E) ratio to their sector’s average. I highlight companies trading at the lowest 1% of P/E ratios within their respective sectors. This is an efficient method of finding value investment opportunities, as these shares are trading lower than their competitors. It is essential to recognise, however, that these lower valuations could be justified.
The first company identified by my filter was Taylor Wimpey (LSE: TW), the UK’s second-largest residential housebuilder. It has had a tough start to 2022, down 46.1% since the beginning of the year and 60% from pre-pandemic levels. This has resulted in the company reaching the top 1% of lowest-ranked shares in its sector.
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Encouraging signs
Despite this, there are more encouraging signs for Taylor Wimpey, with turnover forecast to grow by 6.5%. Earnings per share (EPS) is expected to grow 7.9% in 2023, which is a significant improvement from negative growth. The company has maintained low debt levels, increasing to 3.3% of market capitalisation. This is positive, given the economic pressure faced by the industry in 2020.
Taylor Wimpey now has a P/E ratio of just 5.3, which is forecast to fall further to just 4.9 by next year. The sector average P/E is 5.6, outlining why the company is the lowest ranked in the sector. Despite this, the company’s fundamentals are solid, with a high-profit margin, reasonable cash generation, and significant earning efficiency. This is a very encouraging sign and could be a combination of a discounted share with solid fundamentals.
Dividend potential
Another attractive feature is the current dividend yield of 9.1%, which is forecast to reach 9.8% next year. Furthermore, Taylor Wimpey has a dividend cover ratio of 2.1, indicating that the yield can be comfortably paid using EPS. It has paid this dividend consistently for the last 11 years and grown this level for the previous two years after cutting it in 2020.
However, it’s essential not to ignore why the share has fallen out of favour with the market. Given this company is a housebuilder, there are several sector-wide risks, such as reduced demand and house price falls, both of which could cause the share price decline to continue. Furthermore, despite a significant recovery in 2021, turnover and profit are still below pre-pandemic levels.
Nonetheless, my cheapest-in-sector filter has highlighted an excellent opportunity. I would add Taylor Wimpey to my portfolio once I attain the necessary liquidity.
