The stock market reacted to this mornings full-year results report from FTSE 250 housebuilder Bellway (LSE: BWY) by marking down the shares. Theyre around 6% lower as I write.
Yet the headline figures look pretty good. Revenue rose 8.6% compared to last year, and earnings per share lifted by 3.4%. The directors pushed up the total dividend by a little over 5%. I think the catalyst for the fall in the shares can be found in the outlook statement.
Favourable conditions
Looking ahead, the company said in the report that demand for affordably priced, good-quality housing in the UK is greater than the supply of new housing available in the market. Indeed, the demand for housing has been ratcheted up by the ongoing availability of the governments Help-to-Buy scheme, which stimulates the market along with the current environment of low interest rates.
On top of that, the land market remains attractive and the planning environment favourable. In such conditions, Bellway continues to trade well and has a clear strategy for long-term and disciplined volume growth.
But theres a hitch. The directors said in the report they are mindful that the uncertainty of Brexit could pose a threat to consumer confidence. And they issued what I think reads a bit like a mild, caveated profit warning. Assuming market conditions remain favourable, they said, the strong order book, ongoing investment in land, and work in progress should lead to more moderate volume growth in the year ahead. I reckon that assessment could be what pulled the rug from the share price today.
In fairness, though, the shares shot up by more than 10% at the end of last week, along with UK-facing bank shares and the pound sterling, when the UKs negotiations with the EU switched to a more positive tone. Such movements serve to demonstrate how cyclical the housebuilding business is and how responsive Bellways shares are to macroeconomic news and political news that could lead to changes in the economic outlook.
Brexit could cause a down-cycle
Its not that Bellway is bothered by the mechanics of Brexit, though. It gets most of its materials from suppliers in the UK with a limited number of its supply chain partners manufacturing stuff such as electrical appliances and ceramic tiles in Europe. Those European suppliers have considered alternative trade routes to bring goods into the UK and have increased their stock levels to make sure they have materials available if there are delays at ports.
Meanwhile, the stock looks superficially attractive with its dividend yield running near 4.5%. However, I wouldnt buy shares in an out-and-out cyclical company like this that has been trading with robust profits for a few years while sporting a low-looking valuation. My suspicion is the firm could be trading near the top of its earnings cycle and profits, the dividend and the share price could cycle down sometime soon. Perhaps Brexit will be the catalyst for that.
In this case, Id rather spread my risk over many underlying companies by investing in a tracker fund such as the HSBC FTSE 250 Index Inclusive, which follows the UKs mid-cap index, including Bellway.
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