Investors in housebuilders have had a roller-coaster ride over the last year or so. The share price of Britain’s largest volume builder, Barratt Developments (LSE: LON:BDEV), started 2018 at 648p, but slumped 33% to a low of 434p by 17 December. However, it’s since rallied hard, climbing to 562p, helped by a warm reception for its half-year results yesterday.
Meanwhile, investors in medical devices group Smith & Nephew (LON:SN) (LSE: SN), which put out its annual results this morning (also well-received by the market), have had a less tumultuous time. However, it’s the future I’m really interested in, and where these two FTSE 100 stocks could go from here. Do I think they could make or break your wealth in 2019?
Earnings outlook There’s considerable uncertainty about the earnings outlook for Barratt. The table below shows City analysts’ earnings per share (EPS) forecasts for its current and next financial years, according to Reuters.
| No. of analysts | EPS (mean) | EPS (high) | EPS (low) | |
| Year ending June 2019 | 15 | 67.3p | 74.9p | 47.2p |
| Year ending June 2020 | 15 | 68.6p | 81.8p | 33.1p |
Meanwhile, Barratt’s intended dividend returns (ordinary and special) of 44.2p (7.9% yield) for 2019 and 44.7p (8%) for 2020, are partly calculated with reference to the Reuters EPS mean.
Brexit Bank of England governor Mark Carney warned last September that house prices could crash as much as 35% over three years in the event of a no-deal Brexit. If such a divorce were to trigger a crash, even the lowest EPS forecasts for Barratt, as well as the prospective dividend yields, would go out of the window. The shares would get hammered.
However, in the event of an orderly Brexit, I think the market would likely see the mean or upper-end EPS forecasts as reliable and the dividend as sustainable. The shares could continue to rally, although, as I’ve argued in a recent article, I think there’s a risk of a housing correction or crash — regardless of the Brexit outcome. This wold be due to unprecedented levels of consumer debt, and the world moving towards a phase of quantitative tightening and rising interest rates. Personally, I’m happy to avoid Barratt at this stage.
Stability and visibility Unlike the notorious boom-and-bust housebuilding industry, healthcare tends to be a more stable sector through the ups and downs of economic cycles. Smith & Nephew today reported underlying revenue growth of 2% for its financial year ended 31 December. Underlying EPS rose 7% and the board increased the dividend by 3%.
Turning again to Reuters and City analysts’ forecasts, we find a marked difference to Barratt in terms of the range of EPS projections:
| No. of analysts | EPS (mean) | EPS (high) | EPS (low) | |
| Year ending December 2019 | 14 | $1.00 | $1.10 | $0.94 |
At a share price of 1,500p, the P/E is between 17.6 and 20.6, while there’s a prospective dividend yield of 2%. I believe the company merits this premium valuation, and I rate the stock a ‘buy’.
G A Chester has no position in any of the shares mentioned. 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.
Motley Fool UK 2019