The Persimmon share price (LON:PSN) has dropped an eye-watering 70% from its all-time high in 2020. As headwinds in the housing market continue to persist, Persimmon shares could fall further when the builder reports its half-year numbers on Thursday.
A slew of headwinds has led to the downfall of the Persimmon share price over the past year. Higher inflation has triggered a domino effect of higher mortgage rates and lower mortgage availability. This hasn’t been helped by higher input costs and the end of government support schemes such as stamp duty tax breaks and ‘Help to Buy’ — all of which have resulted in lower completions and a dividend cut.
The recent hotter-than-expected inflation and wage data hasn’t helped sentiment surrounding Persimmon shares either. With markets now pricing in a terminal rate of c.6.25%, mortgage rates and affordability have returned to their October highs, subsequently pushing the Persimmon share price further down.
Persimmon is expecting completions to be on the ‘higher end’ of its guidance of 8,000 to 9,000 dwellings. But with the recent turmoil in the mortgage market, it wouldn’t be a surprise to see downward revisions to the company’s guidance on completions when it unveils its interim results. However, given that mortgage rates only began ticking up again towards the tail end of H1, there’s still reason to expect a relatively positive set of results for the first half:
- Completions of c.4,400 homes;
- Average selling price of c.£273k;
- Interim dividend per share of c.20p.
Even so, where the Persimmon share price ends up by the end of the week will be dependent on the board’s outlook. Analysts have downgraded their earnings expectations over the past three months, which has seen EPS estimates drop from 110.98p to 85.39p.
Tapering costs should on paper, help to ease pressures on Persimmon’s bottom line. Nonetheless, lower average selling prices from declining property values may offset this and negatively impact the Persimmon share price.
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Why are Persimmon shares performing worse than others?
The Persimmon share price has seen the biggest decline amongst its competitors over the past year, dropping 45% —but there are numerous reasons for this. One of which is its reliance on ‘Help to Buy’ volumes, which constituted 21% of completions in 2022. With the scheme now scrapped for the UK (except Wales), Persimmon’s top line is going to suffer from a monumental drop of over 40% in completions.
Another reason would be the fact that first-time buyers make up 42% of the group’s customer base, which isn’t an ideal makeup during times of crisis. As more and more higher loan-to-value (LTV) mortgages get scrapped from the market, first-time buyers are finding it increasingly difficult to get a mortgage.
It doesn’t help that its customer base is less affluent than its peers either. Their average LTV ratios are higher than the likes of Taylor Wimpey and Berkeley. This makes affordability more difficult, thereby impacting sales and the Persimmon share price. Plus, Persimmon shares are currently trading on a forward P/E ratio of 12.2. This means that the stock could fall further given that it still trades above the industry’s long-term average P/E of 12.
Nevertheless, the long-term outlook still looks favourable for the Persimmon share price. Supply and demand for housing remain extremely disconnected, and the only way to resolve this is to build more, which Persimmon is ready to do. And thankfully, the FTSE 100 stalwart’s financials are flawless with zero debt on its balance sheet, thus allowing it to weather the current downturn without financial troubles.
So, provided one can stomach the near-term volatility surrounding the stock, Persimmon shares could end up opening up a great long-term growth story with a massive passive income stream in the future.
Find out: Whether Persimmon shares warrant a ‘Buy’ on my Persimmon share tip.
Please note: Share tips are not personal recommendations or advice and should never be treated as such.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.