Is the Persimmon share price a bargain hiding in plain sight?

persimmon (LSE: PSN) is one of the UK’s largest housebuilders. The stock has generally been a rewarding long-term investment for shareholders — until last year, that is. Since the beginning of 2022, Persimmon’s share price has fallen by 50%.

But Britain is still experiencing a long-standing shortage of new homes. That won’t change anytime soon. So is the sale a cheap buying opportunity for me? Let’s explore.

House market head wind

The headwinds that UK housebuilders face are also noted. Inflation, rising interest and mortgage rates, and weaker consumer confidence all have a negative impact on the housing market.

In a trading statement released last month, the company said it will deliver 14,868 new homes in 2022. This is a 2% increase from 2021, and is at the top end of its own guidance. However, it sees weaker customer demand in the second half of the year as concerns about the economy increase. The forward sales position is down to £1bn from £1.6bn in 2021.

The outlook for 2023 remains bleak – and the government ended the Help-To-Buy scheme at the end of March unexpectedly.

Cheap stock on paper

All of this uncertainty and risk makes the stock look cheap right now. It has a price-to-earnings (P/E) ratio of about 9. In terms of dividends, the company has announced a new capital allocation policy, which is a regular dividend “will be set at a level that is also guaranteed by post-tax profits“.

Clearly, we do not know how much this post-tax profit will add up due to the difficult operating environment. But this suggests dividends will decline in the near term. But even if the dividend is cut significantly, the yield will not fall below 3.6% FTSE 100 average.

One clear positive is that the homebuilder has entered these uncertain times with a healthy balance sheet. They had £860m in cash and no debt, as of December 31.

The long-term demand outlook for new homes in the UK remains positive. Lack of supply combined with a growing population and changing lifestyles means that Persimmon and other homebuilders will have to return to a viable growth rate.

That shows the current stock price can represent a bargain if I am willing to take the long view.

On the edge

I have never owned any stock from Persimmon. But one of the things I love about the business is its industry-leading operating margin. This was achieved through years of investment in its own off-site manufacturing operations in brick, wood frame walls and roof tiles.

This vertically integrated structure reduces building time, costs, and ultimately increases margins. It makes the company stand out in an industry where housebuilders are often seen as a lot of muchness.

But, Citi expect the company’s operating margin to fall below 20% this year, from above 26% last year. In addition, competitors are also increasing their off-site manufacturing.

Overall, there is too much uncertainty at the moment for me to invest in shares. But I’ll keep it on my watch list for now. I will be interested to see what management has to say during the shareholder update tomorrow.