Barratt Developments battered by broker ratings

The firm will reveal its first-quarter trading statement on 11 November, and the recent cut in broker ratings has prompted profit taking.

House builders at work
Source: Bloomberg

The company finished the financial year of 2015 on a high note – but a lowering of its rating by JP Morgan and Liberum in early November has put pressure on the share price. Barratt Developments saw profits surge by 45% last year, as the number of completions and average selling price rose by 11% and 8.7% respectively. Barratt, like its rivals, has enjoyed an excellent run over the past seven years, but JP Morgan felt that it is ‘fully valued’ and that is why the bank lowered its recommendation from overweight to neutral.

The two broker downgrades in quick succession triggered profit taking on Barratt and its competitors, but the overly dovish comments from the BoE’s Mark Carney put the sector back in positive light. As I previously stated, ultra-low interest rates is one of the main factors benefitting Barratt Developments, and now that interest rates in the UK may not rise until 2017, it will bode well for the sector. UK house prices are rising and due to supply issues they are tipped to keep doing so, and Barratt Developments is performing well in all regions, northern England in particular.

Despite a dip in UK mortgage approvals in September demand is by and large strong, and banks are keen to lend also. In light of the latest statement from Mr Carney I would imagine the risk appetite for home loans will increase. JP Morgan may have lowered its recommendation for Barratt from overweight to neutral, but it maintained its positive outlook for the company.

Barratt Developments will report its first-half results in February 2016, and the market is expecting revenue of £2.86 billion, which compares with the second-half revenue from last year of £2.18 billion. The company will report its full-year results in September 2016, and dealers are expecting revenue of £4.01 billion and adjusted net income of £541 million. These estimates equate to a 6.6% rise in revenue and a 20% jump in adjusted net income.

Equity analysts are bullish on Barratt Developments, and out of the 15 ratings, five are buys, eight are holds, and two are sells. The average target price is £6.64, which is 15% above the current price. Investment banks are even more bullish on Taylor Wimpey, and out of the 15 recommendations, nine are buys, five are holds, and one is a sell. The average target price is 210p, which is 18% above the current price.

Barratt’s stock has been trading lower since September and the short-term trend  looks set to continue, £5.58 is the initial target, if that mark is cleared then the £5 area will provide support. The medium-term outlook is still positive as the stock has been rising since August 2011 and the resistance at £6.60 is the upside target. 

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