Did Persimmon's 'tone' spook the market?

It's not just about the numbers. Investors like to hear a bullish story from companies, too. That might explain why Persimmon's (PSN) share price sank 4 per cent in early trading despite its weak performance being in line with analyst expectations.

As Analyst Aynsley Lammin from Investec put it, although the results contained no surprises, "the tone on recent trading and the outlook seems a bit more cautious than what peers have recently reported". In other words, it's not what Persimmon said but how it said it.

The housebuilder warned that "the near-term outlook remains uncertain" and that "market conditions are expected to remain subdued throughout 2024". Its forward sales figures are increasing, albeit modestly, with high interest rates continuing to make buyers wary. The net private sales rate rose to 0.59 for the first 10 weeks of 2024 from 0.54 in 2023.

Consensus forecasts are for earnings per share to return to growth this year, hitting 84.3p and growing to 106p by 2025, and covering dividend payments of 61.6p per share this year and 67.2p next year. 

We are less confident because growth looks costly. Persimmon anticipates switching from a net cash position to a net debt position as it invests in building again. Completions nosedived to 9,922 in 2023 from 14,868 in 2022, highlighting the levels it will need to return to.

Lammin said he did not expect the financing costs from debt to hit profit forecasts materially. Even so, we are bearish on this stock. If Persimmon's balance sheet predictions prove correct, it would be one of the only FTSE 350 housebuilders not sitting on a cash pile. Its rivals could easily outmanoeuvre it in the market recovery with their relatively healthier coffers. Sell.

Last IC view: Sell, 1,161p, 10 Aug 2023