The share prices of house building and construction companies are beginning to steady after a strong...
The share prices of house building and construction companies are beginning to steady after a strong period of growth over the past year, according to Trevor Green, UK equity fund manager at Credit Suisse Asset Management.
Green says that with the UK economy in good shape and the US slowdown, investors have been looking at domestic orientated sectors like house building.
Likewise, construction companies have seen an increase in the number of contracts on offer and government spending, from which they are now seeing decent returns. Just before the election the Government is also promising more public spending in the future on such things as hospitals
Angus Franklin, UK fund manager at Baillie Gifford, says house builders were oversold during the tech bubble and have gained over the past year because of their low valuations and decent earnings growth.
Franklin says all these factors are still in place and house builders are still trading in low P/Es, with double-digit earnings growth, in a low interest rate environment.
While house building companies have not traditionally been well managed, he says, they now follow a far more disciplined approach in their business with more shareholder friendly initiatives, such as buying back their own shares.
Carl Stick, fund manager at Rathbones, says that house building companies are arguing that they should be rated more highly as the product they now offer is much higher in quality, and the management is stronger than five to 10 years ago.
Stick says house builders now have to think a lot about planning, as planning permission is harder to obtain. For example, house building companies are getting more involved in urban regeneration, where it is not only a house but all the surrounding area that has to be worked on, so companies are having to be much more creative in what they construct.
As a result, Stick says these companies are becoming different businesses with better product and companies want to be seen as part of a less cyclical sector than in the past.
Green believes there is good demand for both house building and construction and, as both are making good returns, the outlook is for them to continue in the same vein.
He says that unemployment being at a long-term low is a key driver to increasing consumer confidence, which is feeding through to house building as more people are upgrading their homes.
Franklin says companies such as Bovis, Redrow, Bellway and McCarthy, which have accumulated decent land banks, are the ones doing particularly well.
For the year to 29 May 2001, Bellway is up 27%, Bovis has returned 13%, Redrow is up 6% and McCarthy has increased by 7%. Franklin says that some money has come out of these stocks in the past month just on the fact they have been performing so strongly in recent months. Redrow's share price hit its low at £1.60 in July 2000 and has been as high as £2.55 in April 2001, in the past month however it slipped back to £2.25.
l Low price/earnings ratios.
l Double-digit earnings growth.
l Decent outlook set to continue.
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