Which value is better, Persimmon or Barratt’s share price?

Image source: Getty Images

Persimmon’s (LSE:PSN) stock price has fallen badly in recent years—you don’t need me to tell you that. Barratt’s development (LSE:BDEV) also fell, although not as hard.

But these are stocks in a sector that are sure to enjoy strong long-term demand for years to come, right?

Value comparison

The business of the two is almost identical, and I don’t see any particular problems either. So how do we decide which one is better to buy now?

I’ll start by comparing their financial valuations. Here are some key moves from the two companies:

Size/PersimmonBarratt Company Current share price1.096p424p1 year change-38%-10%5 year change-56%-20%Price to earnings ratio12.66.8Dividend yield5.7%8.6%Market cap£3.5 billion£4.1 billion(P/E ratio and dividend yield are approximate)

Those are some hefty stock price drops. But we just had the biggest drop in average house prices since 2009.

Mortgage pain is painful. And inflation has pushed up the price of building materials. That means margins are under pressure, and builders’ profits are likely to suffer.

The headlines are bleak

But when I read the headlines, I see people complaining about house prices that are set to drop 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 do not.

Just this week, Ocado told us he thinks the UK is “definitely on top of the worst” of food price inflation. And food makes up a big part of the total.

I think the pain tends to be short term. And long-term demand for homes can’t just disappear, can it?

I just don’t think the stock valuation of these two is sufficiently representative of the long term returns they might generate. Like every time a sector goes down, I think the stock price has dropped too far.

Stock valuation

From the figures above, the valuation of the two looks quite different.

Persimmon’s P/E of 12.8 may seem a bit high, but forecasts suggest it will drop to nine in 2025. In contrast, Barratt’s low P/E of 6.8 looks set to climb to 10.

There are differences in dividend yields as well. But the persimmon is already chopped. And City expect Barratt’s yield to drop next year, to 4.8%.

On these measures, based on the outlook for the next three years, the two stocks appear to be about the same value.

Which is the best?

Forecasting is very 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 the stock price drop further before things improve.

But you know, when house prices go down, land prices have to go down too. So long term, I would expect margins to recover, and earnings and dividends to continue.

I bought Persimmon stock, but I think I’ll be just as happy with Barratt Developments. Or Taylor Wimpey, or…