Earnings: why the Barratt share price is too cheap to ignore

House builder Barratt’s Development (LSE: BDEV) posted strong half-year numbers today, but warned that its outlook remains uncertain. Barratt’s share price was unchanged in early trade, but has fallen 25% over the past year.

This tells us that the market has been anticipating the problems we are seeing now, so maybe the stock is flat this morning. I consider this to be respectable as well FTSE 100 builders may be too cheap to be noticed at the current rate.

A strong safety net

Today’s numbers look pretty interesting to me. Barratt entered the second half of last year with a strong order book. The company has been able to convert much of this into cash in the last six months by completing 8,626 homes. That compares with 8,067 completed during the second half of 2021.

Revenue for the six months to December 31 rose 24% to £2,784m. Pre-tax profit for the period was up 16%, at £502m. That gives a pre-tax profit margin of 18%. Not bad at all.

Shareholders will receive an interim dividend of 10.2p per share. Brokerage estimates suggest the total payout for the year ending June 30 could be 34p. That gives Barratt shares a tempting forecast of 7.4%.

Although payments are expected to fall in 2023/24, to maintain a safe level of income coverage, estimates show that the stock will still need to return more than 5%. I don’t see this as a big concern as it has been flagged before.

Worried Outlook?

Sure enough, I could see some clouds on the horizon. Barratt’s order book at the end of December had fallen to 10,854 homes. That’s lower than the 15,736 homes ordered at the start of 2022.

It will take some time to rebuild the order book, according to current trading. New home bookings have fallen off a cliff this year and are running 45% below levels seen in January 2022.

Chief executive David Thomas said that “We have seen some early signs of improvement” during January, but warns investors that it is too soon to be sure that the situation is improving.

My feeling is that the stock market rally we’ve seen so far doesn’t reflect real-world conditions. I think there is still some pain from rising interest rates before the housing market stabilizes.

However, I don’t think it’s a serious collapse. In fact, I believe Barratt shares are looking very cheap right now.

Too cheap to notice?

I have increased my exposure to housebuilders in my own stock portfolio over the last few months. Today’s results from Barratt support my view that the sector is well valued.

The company reported a net book value of 462p per share. It shows the current value of cash and property assets on the group’s balance sheet.

As I write, shares are changing hands at 470p. That tells you that the stock is trading in line with book value.

There is still a risk that market conditions will worsen, both in the stock market and the housing market. But Barratt is a profitable business with a strong reputation and good market share.

In a long-term view, I think that buying shares at current levels should yield good results.