Persimmon share price under pressure ahead of Q2 earnings

The Persimmon [PSN.L] share price managed to arrest the previous week’s 3.53% slide, predominantly on concerns over the outlook for the UK’s housing market, gaining a marginal 0.13% through last week into Friday 1 July’s close at 1,874p.

Ahead of the FTSE 100 stock’s second-quarter earnings update on 7 July, the housebuilder maintained a positive outlook in its last update to the market in April, despite a number of macroeconomic challenges.

Investors will be watching to see whether Persimmon can maintain its guidance and chart a course through the current difficulties to see solid growth in the medium and longer term.

What’s happening with Persimmon’s share price?

Persimmon’s share price has been in a downtrend for most of 2022, falling 36% from its open at 2,900p so far this year. The Persimmon stock now lies 39.6% from its 52-week high of 3,100p set on 8 July 2021, plunging to a 52-week low at 1,770p on 23 June. 

The shares fell from the open at 2,102p to 1,932 on 16 June, a decline of 8.1%, after the Bank of England raised interest rates by a further 0.25% to 1.25% — the highest level in 13 years. 

What to look out for in Persimmon’s earnings update

Investors will be keen to gauge the company’s latest take on the current economic and geopolitical challenges it faces, and whether there’s any negative change in its outlook since its first quarter update on 27 April. 

At the time, CEO Dean Finch said: “Persimmon continues to perform well. We are currently trading in line with expectations, demand remains strong, our private average sales rates are circa 2% higher year-on-year and we have a robust forward order book of circa £2.8bn.”

Investors will be watching to see if there’s any change in Persimmon’s expected year-over-year volume growth of 4–7%, and whether the company’s margin level has been maintained. Finch also said back in April that “demand for newbuild homes continues to outstrip supply and mortgage availability remains positive”. 

More than two months on and with interest rates continuing to rise to combat soaring inflation, it will be especially interesting to see whether this positive view remains intact. Finch did warn that the firm was “mindful… of the shorter-term uncertainties, particularly regarding consumer confidence, cost inflation, rising interest rates, the cessation of Help to Buy and the impact of the tragic conflict in Ukraine”. 

Can Persimmon overcome a challenging environment? 

The UK’s housing market still remains buoyant — UK property website Rightmove reported that house buyer demand was up 113% in May versus the pre-pandemic five-year average. Demand for new-build homes is likely to remain robust, as the government struggles to maintain its target to build 300,000 new homes in England per year — in 2021, the figure was just shy of 181,000 new homes. 

However, fast-climbing UK inflation — which reached a 40-year high of 9.1% in May — and interest rates are likely to start weighing on buyers’ affordability, as the cost of living escalates and mortgage rates also rise. House prices and the number of buyers in the market are both likely to fall as potential buyers hold off from purchasing new homes. 

It’s likely to be a challenging period for the sector, and could hold back Persimmon’s share price, particularly with the Bank of England set to continue raising rates for the foreseeable future, at least until the inflation rate starts moving back down to its 2% target rate. 

Financials suggest positive longer-term outlook

Despite short term headwinds, Persimmon stacks up well in comparison with its peers in a number of key metrics. For example, analysts predict a return on equity of 21% over the next three years, according to Simply Wall St, versus an industry average of 11%. Its annual net income growth, although just 0.3% per year over the past five years, is above the industry average, which shows a 7.8% decline. Revenue is also forecast to improve, with growth of 4.26% per year. 

Investors looking for a consistent dividend payout are unlikely to be disappointed by the company, which has paid out over a long period. In 2021, the £2.35 dividend marked a 20.5% increase year-over-year. Analysts’ consensus estimate is for a dividend of £2.39 for the upcoming fiscal year, representing an increase of 1.8%. And for investors searching for value in the market, Persimmon is trading at 53.9% below its fair value estimate according to SimplyWallSt, suggesting there’s plenty of upside potential. 

What’s analysts’ take on Persimmon’s share price prospects?

Analysts following Persimmon are optimistic on the housebuilder’s outlook. The 14 analysts offering 12-month price targets have a median target of 3,075p, with a high estimate of 3,780p and a low estimate of 2,293p, according to the Financial Times. The median estimate represents a potential upside of 64.1% from last Friday’s close at 1,874p. 

Reinforcing the potential share price growth, analysts have a consensus ‘outperform’ on Persimmon stock, with six ‘buy’, seven ‘outperform’ and five ‘hold’ recommendations.