Persimmon and Taylor Wimpey earnings to shed light on housebuilders

Housebuilders in focus as investors await rate hike implications

The housing sector comes back in the spotlight this week, with earnings from Persimmon and Taylor Wimpey on Wednesday and Thursday respectively. Historically speaking, the housing sector has typically been protected during downturns, with governments aware of the negative economic implications if housing assets collapse in value. Unfortunately, the rampant inflation seen over the course of this crisis has left the Bank of England with little alternative than to ramp up rates in a bid to drive down CPI. This clearly poses a threat to the housing sector, with soaring mortgage rates dampening demand and lowering potential borrowing levels. Meanwhile, economic struggles will typically bring economic hardship, raising the likeliness of a house price collapse that in turn weakens demand and pricing power for housebuilders. Unfortunately, they are also squeezed from both sides, with the prospect of lower prices coming as rising costs dent margins. The chart below from the Rightmove HPI survey does highlight how interest rates have impacted the costs associated with home ownership.

Data-wise, we have seen some jitters from the housing market, with the latest Rightmove fourth consecutive negative reading (-0.6%) bringing the most pessimistic view. Meanwhile, mortgage approvals have slumped to the lowest level since mid-2020, and housing completion data from the HMRC showed the lowest number since 2015. However, expectations of a wider collapse for the economy appears to be holding off for now, with some speculating that the widely anticipated recession may not occur at all. Nonetheless, with US inflation showing signs of stalling, there is a fear that central banks will find it difficult bringing CPI down towards target, dampening hopes of a swift pivot in monetary policy later in the year.

Persimmon

Persimmon report their full-year earnings on Wednesday 1 March, with traders keeping a close eye on the latest revenues, profits, and the outlook for the year ahead. We have already been provided a significant amount of data within the recent trading update, with sales and average prices both rising over the course of the year. However, forward sales are a clear concern, highlighting the likely focus the company’s outlook on Wednesday.

The housebuilder is forecast to announce full-year revenues of £2.2 billion (+4.5%), thanks in no small part to an expected 25% jump in H2 revenues. Profits before tax are expected to rise from £966.8 million to £998.8 million (+3.3%). Finally, the earnings per share figure is predicted to come in at £2.43, compared with £2.47 for 2021. Looking at the analyst recommendations, it is clear that the concern around the sector brings plenty of uncertainty. A wide spread of views does centre around a majority of 10 analysts taking on a ‘hold’ view.

Persimmon shares have been heading lower over the course of this month, with price falling towards the £13.65 support level. A break below that level would bring about expectations of further downside, ending the recent recovery phase. However, it makes sense to be aware of a potential rebound from this recent descending channel, with a positive earnings report bringing the potential for a bullish breakout. A move through £14.77 would bring greater confidence of a bullish breakout and continuation of the bullish trend seen over the course of 2023 thus far.

Taylor Wimpey

Taylor Wimpey report on Thursday 2 March, coming off the back of a largely mixed trading statement released last month. Completions and the average sale price were lower than in 2021, while the order book value of £1.94 billion is also below the £2.55 billion seen in December 2021. Looking ahead to Thursday, markets are expecting to see full-year revenues of £4.44(+3.6%), with pre-tax profits of £886 million (+10%). Earnings per share are forecast to rise an impressive 7.7% to 19.39p. Analysts are relatively positive for the stock, with 12 of 19 providing some form of buy rating.

Looking at the chart, the company has been on a strong run of late, with price gaining 55% since the September low. That bullish trend relies on the continued trend of higher lows. As such, a bullish outlook holds unless price falls back below the £1.13 support level.