Persimmon’s share price has tanked. Is this an investment opportunity?

At persimmon Share price history of PSN. A year ago, shares in the UK housebuilder were trading near 2,300p. However, it can now be recorded for less than 1,300p.

Is this a good investment opportunity? Or does Persimmon indicate a risky bet from here? Let’s have a look.

Long-term opportunities?

Few industries are as cyclical as housing. This is an industry that experiences booms and busts on a regular basis. And, now, we are very much in the bust stage.

This was illustrated when Persimmon published its full year results earlier this month. Not only home builders advise that the outlook for 2023 is uncertain as they are unable to provide a profit forecast for the year. It also reduced the dividend by 75%. It seems that higher interest rates, economic uncertainty, and soaring costs have really hit the UK housing market hard.

Now for those with a long-term investment horizon, there may be an opportunity here. At some stage, the situation in the housing market is likely to improve. It is worth noting that Persimmon believes that the fundamentals supporting demand for new homes remain “strong“.

However, I do not expect a ‘V-shaped’ recovery in share prices here. I think the way back can be slow and drawn out.

A slow rebuild

We can expect 2023 to be a challenging year for UK housebuilders. In Persimmon’s full year results, it said the forward sales position was now £1.52bn, down from £2.21bn a year earlier. That represents a drop of over 30%. So sales are likely to drop significantly this year.

The sales rate seen over the last five months means that completions will drop significantly this year and as a result, margins and profits.

Persimmon CEO Dean Finch

Worryingly, City analysts do not expect the company to return to pre-pandemic sales levels for at least the next four years, according to Refinitiv forecasts.

In previous industry slowdowns, the government has often come to the rescue with plans such as Help to Buy (which helps first-time buyers with mortgages). However, there is currently no such support. However, the government has actually introduced a new 4% tax on housebuilder profits in an effort to generate income to cure unsafe cladding. This is not good.

Adding to the uncertainty here is a recent investigation into the sector by the UK’s Competition and Markets Authority (CMA). Concerned that housebuilders are not delivering the homes people need at sufficient scale or speed. The regulator said that if it finds competition or consumer protection issues, it is prepared to take the necessary steps to address them.

So overall, the outlook for Persimmon (and other UK housebuilders) looks rather bleak in the medium term. It is worth pointing out that analysts at Peel Hunt just downgraded Persimmon shares from ‘hold’ to ‘reduce’ at the end of the outlook.

My view

Given the high level of uncertainty here, my view is that Persimmon stocks are best avoided for now. They can bounce back at some stage. But, all things considered, I think there are better (and safer) stocks for investors to buy today.