This time last year, I turned bearish on house-builders. In a detailed analysis of one of the FTSE 100s giants, Persimmon, I warned readers that despite its undemanding earnings rating, the stock was dangerously overvalued. Conversely, I saw good value in expensively-rated self-storage specialist Lokn Store(LSE: LOK) which had just released its annual results.
Persimmons shares are down over 20%, and those of fellow blue-chip builders Barrattand Taylor Wimpey (LSE: TW) have lost nearer 25%. Meanwhile, Lokn Store hasnt exactly shot the lights out, but its shares had advanced from 370p to 374p prior to the release of its latest results this morning and theyve jumped almost 10% higher to 410p, as Im writing.
After the builders big falls, are they now good value? And what of Lokn Store, after its rise today?
Value strategy
With stocks in cyclical industries house-builders are some of the most cyclical of all I believe a value strategy of buying them when theyre cheap and selling them when the value has been outed is the most profitable approach. This rests on my conviction that house-builders will always be prone to boom and bust and that its never different this time.
Ive found the asset valuation ratio price-to-tangible book value (PTBV) to be the most reliable indicator of when to buy and sell house-builders. Id buy when the PTBV is at, or below one, which tends to be around the bottom of the cycle, and sell when the PTBV rises to a level that history suggests is around the top.
For example, when I moved to rating Taylor Wimpey a sell last November, the share price was 194p and the PTBV was 2.1. Today, at 154p, the PTBV is 1.5. But to get down to my buy-around PTBV level of one, the shares would need to fall to about 100p. As such and despite Taylor Wimpeys cheap trailing 12-month earnings multiple of 7.7 Im content to avoid the stock at this stage and await developments.
Growth outlook
After todays results for its financial year ended 31 July (and rise in share price), Lokn Stores trailing 12-month earnings multiple is a little cheaper than at this time last year. Nevertheless, at 31.4 its still way higher than house-builders like Taylor Wimpey.
However, its a very different matter when it comes to asset valuation. Lokn Store today reported a 15.3% increase in adjusted net asset value per share to 480p. The adjustments are for the valuation of leasehold stores and deferred tax and are fair enough, in my view. But I exclude intangible assets, which brings the value down to 468p. Lokn Stores PTBV is a highly attractive 0.9.
Looking to the future, management said today: We have achieved a notable acceleration in our store pipeline to 13 sites which will increase operating space by 32.4% over the coming three years. This will add considerable momentum to sales and earnings growth.
With the low PTBV, an outlook for robust earnings growth, the company also delivering good cash generation, and having a strong balance sheet, Lokn Store remains a business Id be happy to buy a slice of today.
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