Is the Taylor Wimpey share price the biggest value trap in the FTSE 100?

The Motley Fool
A brown bear sitting on a rock
A brown bear sitting on a rock

With Taylor Wimpey(LSE: TW) trading on a price-to-earnings (P/E) ratio of around 10, the stock seems to offer good value for money. That's especially the case at a time when the FTSE 100 is trading close to a record high, and investors are in bullish mood.

However, the UK property sector could face a period of significant uncertainty. Consumer confidence remains at a low ebb, and with house prices failing to offer gains in recent months there could be difficulties ahead. As such, is the housebuilder worth avoiding alongside a sector peer that released an update on Tuesday?

Mixed outlook

With Brexit now only a matter of months away, it is perhaps unsurprising that consumers are feeling anxious about the future. Higher levels of inflation have only recently subsided, and with the prospects for the UK economy's growth rate being downgraded over the last couple of years, the outlook for the property industry seems to be challenging.

At the same time though, there remains a fundamental imbalance between demand and supply. This means that with interest rates expected to remain low over the next few years, demand for new housing may continue to outstrip its supply.

Demand growth may be reinforced by government action, with various schemes including Help to Buy having had a positive impact on the housebuilding sector. Given that a change in government is not anticipated over the next few years, it may be reasonable to assume that Taylor Wimpey and its peers will continue to benefit from first-time buyers receiving government support.

Low valuation

Of course, Taylor Wimpey is a relatively cheap stock. Given that it is due to report a rise in earnings of between 4% and 5% per annum over the next two years, it could be argued that it justifies a higher valuation. That's especially the case since it offers a dividend yield of nearly 8%, as well as a strong balance sheet and large land bank. As such, and while its short-term share price performance may be volatile, now seems to be a perfect opportunity to buy it for the long run.

Improving performance

Also offering a low valuation within the property sector is St. Modwen(LSE: SMP). The diversified regeneration specialist released a trading update on Tuesday which showed that it has made a solid start to the financial year, with it being on track to meet its guidance for the full year.

The company has been able to make progress with its new strategy which was launched a year ago. This will see it draw on the significant potential within its pipeline, as well as focus on execution to a greater degree in order to deliver growth in profitability and return on capital. For example, it has shifted its portfolio towards assets with the strongest structural growth prospects, while also accelerating its industrial/logistics development activity.

With St. Modwen trading on a price-to-book (P/B) ratio of 0.9, it seems to offer a wide margin of safety. As a result, and with its performance being strong in recent months, it could offer high return potential.

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Peter Stephens owns shares of Taylor Wimpey. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.