Company news flow finally seems to be picking up with a couple of names I have covered in the past reporting updates today. The first of these is the house builder Persimmon (PSN) which unsurprisingly, given the strength in the housing market and the resultant price inflation, reported a strong trading update.
The average selling price for the Group in 2014 was c. £190,500, an increase of 5% over 2013 (£180,941). Full year revenues increased 23% over the prior year to £2.6bn (2013: £2.1bn). This revenue figure looks to be about 1.5% ahead of consensus forecasts (Source:Reuters / Stockopedia). They also remain confident of a further improvement in operating margins for the second half of the year which will underpin significant growth in pre-tax profits and excellent cash generation for the year ended 31 December 2014.
This suggests to me that they could slightly exceed current earnings estimates and perhaps report around 120 pence of earnings which together with the forecast dividend of 78.3 pence would leave them on 12.8x and a yield of 5% based on a price of 1537 pence this morning. They also have cash on the balance sheet of £378 million (around 8% of the market cap.) a strong forward order book and they have been able to add to their land bank.
So all in all seems reasonable, but I suspect the housing market may soften a little in the first half of 2015 given the strength last year and perhaps some uncertainty with the election coming up. But with the on going help from the government and the need for more houses to be built they still seem well placed to grow in the medium term with a likely tail wind of further modest house price inflation to help so I'm happy to hold on to this one for now, although I did top slice some Bellway at the end of last year.
Meanwhile today we have had the first of the food retailers, Sainsbury's (SBRY) with an update on their Q3 and Christmas trading. Here as we all know we are seeing the effects of price deflation which is leading to them seeing falling sales with:
So I will be steering clear of this one having sold it last year when Justin King stepped down as i think the price deflation and margin squeeze they are facing continues to be a toxic mix. Added to which they look like they will be cutting their dividend for the next two years which is never good in my book, but more on that another day.
Summary & Conclusion
I titled this piece inflation versus deflation and here you have an example of the effects of these forces on two businesses and this is why I currently favour Persimmon over Sainsbury's plus the opposing trends in their likely dividend payments, although Persimmon's is somewhat complicated by their capital return programme. But it does emphasis the importance of looking at trends in turnover and margins among other things when researching a company as per my check list. Plus see the chart below for what it has meant for the shares.