PS these are not my words of wisdom I'm quoting.Originally Posted by Nor
Meanwhile, Fletcher Building appears to have suffered from this souring of sentiment towards homebuilders. This is probably why the share price has been down in 2022 despite consensus earnings upgrades. For more detail on how the relationship between share price and earnings revisions work you can refer to this previous article. Ultimately this situation will resolve with either the share price recovering or consensus earnings forecast falling.
Chart showing the recent bi-furcation between earnings revisions and share price
While Fletcher Building hasn’t been savaged as badly as US homebuilders, while half of its revenue in New Zealand comes from residential, a chunk of that will be renovations and repairs, and none of its revenue in Australia comes from residential, it is estimated to be trading on a price to earnings ratio of 9x forecast earnings. That’s not 4x cheap but it's still cheap and cheaper still when compared to the broader New Zealand market where the average PE is 20x. There can be little doubt that the fizzy top is coming off house prices here, but there remains a very healthy pipeline of activity due to capacity constraints creating a backlog of work.
It will be fascinating to see how house prices respond to changing affordability and changing underlying demographics. In the US one part of the puzzle is already baked in, the coming wave of Millennials that will be looking to buy a house over the next decade. In New Zealand that part is less clear, our demand for housing is driven by migration. If there turns out to be a pent-up surge of migrants heading to New Zealand from China, Europe and the US, we might just see house prices stabilise around current levels.
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