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The UK stock market has struggled to find direction in recent days in the wake of troublesome economic forecasts. Nonetheless, one company update offered some relief from the pessimism, making it my stock of the week.
Home builder Taylor Wimpey (LSE:TW) Shares soared on Wednesday following the release of a positive set of half-year figures.
Hailing an “excellent” performance, the FTSE100 The giant reported a 16.3% rise in pre-tax profit to £335million compared to the same period in 2021. Although down from the previous year, home completions – at 6 790 – were also “slightly ahead of advice“.
All of this is impressive, given that the industry has faced cost pressures as well as the end of the stamp duty suspension introduced during the pandemic.
Ahead of expectations
Can last week’s momentum continue? It is certainly not impossible.
New CEO Jennie Daly is (understandably) optimistic, commenting that “housing market fundamentals remain positive, supported by a persistent imbalance of supply and demand and good availability of
mortgages at attractive prices.”
She added that the demand for Taylor Wimpey’s homes “stay strong“and that the company boasted of a”sector-leading land bank.” With an order book that now stands at £2.8 billion, the numbers back that up.
Perhaps, most notably, the company announced that group operating profit for the year was now to be “around the top endof the current analyst consensus. In a time of seemingly relentless economic misery, that all sounds pretty good to me.
Risks to consider
While last week’s update was encouraging, it’s important for me to remain aware of the risks of buying shares of Taylor Wimpey – or those of any other listed homebuilder – now. My stock of the week does not necessarily become my ‘stock of 2022’.
A slowdown in the UK economy and rising interest rates could have a temporary impact on the number of people looking to buy properties for a while. It could also shake investor sentiment. In difficult times, a rotation into more defensive/less cyclical stocks seems prudent. Preserving capital is arguably becoming more important than realizing capital gains.
Everything in the price?
Despite this, what is the share of the price in the shares of Taylor Wimpey? I think a lot. After all, nothing I said above is revealing. The housing market has been hot since the pandemic and we now know that a prolonged recession seems likely.
After falling almost 30% in 2022, as I type, the stock is also changing hands at a price-to-earnings (P/E) ratio below seven. That’s already low, even if those earnings should be revised downwards later in the year.
While last week’s gains may end up being lost, the dividend stream still looks pretty secure.
Taylor Wimpey shares fetch a hefty 7.7%. Such a dividend would normally be a red flag for me. Unless we see the mother of all earnings revisions, payouts look likely to be easily covered by earnings. It would mean more money for me to reinvest, which would eventually increase the value of my wealth.
I have already given a large place to home builders. However, I have to say that I am strongly considering starting a position here.