Is FTSE 100-member Taylor Wimpey’s share price a steal after a 20% fall?

Arrow descending on a graph
Arrow descending on a graph

Since May, the share prices of a number of FTSE 100 companies have come under pressure. Investors have become increasingly unsure about the outlook for the world economy, while Brexit may also be weighing on the stock market’s performance.

Housebuilder Taylor Wimpey(LSE: TW), for example, has declined by 20% in the last six months. Demand for housing, it is feared, could fall if the UK’s economic performance fails to improve. As a result of its decline, could the stock be worth buying alongside another faller that reported a positive trading update on Monday?

Improving outlook

The company in question is engineering services business Babcock(LSE: BAB). It reiterated its important supply arrangements with the Ministry of Defence, while also highlighting that it is on track to meet its financial guidance for the 2019 financial year. It continues to exit a number of small, low-margin businesses including the Appledore shipyard. It is also reshaping its oil and gas business, seeking to deliver growth.

The company continues to seek to reduce debt. It anticipates that its net debt-to-EBITDA ratio will be around 1.4 times by March 2019, and expected to fall to 1.1 times by March 2020.

Looking ahead, Babcock is forecast to post a rise in earnings of 2% this year, followed by further growth of 5% next year. It trades on a price-to-earnings (P/E) ratio of 7.3, which suggests that it offers a wide margin of safety at the present time. With demand for defence-related products and services expected to rise over the medium term as the industry benefits from an end to austerity, the outlook for the stock could improve.

Fundamental strength

The fundamentals of the housing market continue to be strong, and this could lead to a successful recovery for the Taylor Wimpey share price. Interest rates are expected to remain low, and it is seemingly unlikely that the Bank of England will risk a more hawkish monetary policy at a time when the UK is undergoing major political and economic change. This could help to keep mortgage availability high, and may lead to rising house prices over the coming years.

With the government’s Help to Buy and stamp duty relief policies helping to drive demand for new-build properties higher, the performance of UK housebuilders may surprise the stock market. Taylor Wimpey has been reporting robust demand for its properties, and this trend could continue, due in part to an imbalance between demand and supply which has worsened over the last few decades.

With the company’s share price having fallen by 20% in six months, it now has a P/E ratio of around 7.8. This suggests that it could offer strong long-term growth potential, with the prospect of an upward re-rating, alongside growing earnings, set to drive the company’s valuation higher. Although it may take time for it to realise its full valuation potential, the stock seems to have value investing appeal.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Peter Stephens owns shares of Babcock International Group and 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.