Is the Persimmon share price a bargain or should I buy this FTSE 250 turnaround stock?
The Persimmon(LSE: PSN) share price performance has continued to disappoint in recent months. It’s fallen by over a third in the last six months, showing little sign of mounting a successful comeback. Investors, it seems, are pricing in a difficult period for the house-building sector, with demand for new builds seemingly uncertain ahead of the critical phase of the Brexit process.
Of course, Persimmon is not the only share which has experienced a difficult period in recent months. Reporting on Tuesday was a FTSE 250 stock which has delivered significant falls of late. Could it offer better recovery potential than the house-builder?
Improving performance
The stock in question is high-performance polymer solutions business Victrex(LSE: VCT). It released its preliminary results for 2018, showing a rise in revenue of 10% to £326m. Gross margin increased by 50 basis points, which helped to boost gross profit by 13% to £208m. The company’s improving financial performance was driven by core growth, as well as mega-programme progress. Its Industrial markets recorded strong growth, while Medical revenue increased by 3%.
The company expects continued momentum in its core polymer business in 2019. However, it anticipates that recent market softness in Automotive may hold back its ability to generate significant growth, while no expected volumes in Consumer Electronics may hold back its overall performance.
Looking ahead, Victrex is expected to post a rise in earnings of just 1% in the current financial year. Given that it trades on a price-to-earnings (P/E) ratio of 19.2, this suggests that it may be overvalued at the present time.
Recovery prospects
Having fallen heavily in the last six months, Persimmon now has a P/E ratio of 6.8. This suggests the company is about to experience an extremely challenging period, with investors seemingly pricing in falling profitability.
However, the house-builder is expected to report a rise in net profit of 7% in the current year, followed by further growth of 3% next year. As a result, it could be the case that the stock market is overly-cautious about its financial outlook at a time when demand for new homes remains healthy.
Of course, political and economic risks are high at the present time. There could be further twists and turns over the coming months in terms of the Brexit process. However, the fundamentals for the housing market appear to be sound. High demand for new homes is being backed by low interest rates, high levels of employment and the Help-to-Buy scheme. Meanwhile, there’s a limited supply of homes which is unlikely to be addressed in either this parliament or the next one.
Clearly, further falls could be ahead for the Persimmon share price after what has been a tough period for its investors. In the long run though, this could prove to be a buying opportunity which delivers significant total returns for investors.
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Peter Stephens owns shares of Persimmon. The Motley Fool UK has recommended Victrex. 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.
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