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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Taylor Wimpey builds on strong foundationsMarch 01 2014, 7:00am
It has been a mixed week for equities, with some global indices touching record highs despite further uncertainty in China and lacklustre US data.
A flurry of bid and merger activity helped the FTSE 100 close at a fresh 14 year high and within striking distance of the all-time closing high of 6930 on 30th December 1999, the peak of the dotcom boom. Meanwhile, the S&P 500 touched a record intraday peak of 1858, although weather affected data prevented a chart breakout.
Mounting concerns about lending to China’s property sector and exacerbated worries about the country’s corporate earnings outlook weighed on sentiment, sending the Renminbi to a six month low against the dollar.
China’s house prices grew at their slowest pace for a year in January, as news that Chinese banks had suspended loans to some property developers and tightened lending to real estate related industries supressed the market. The country’s five-year credit default swap has been steadily climbing, which may prompt a ratings outlook downgrade from a major credit rating.
The US currency also came under pressure after consumer confidence fell more than forecast in February, as growing concern about the world’s largest economy outweighed improving perceptions of its current state. The Conference Board’s consumer confidence index fell to 78.1 from a downwardly revised 79.4 in January, below expectations for a reading of 80.0, although it remains elevated compared to last year.
Meanwhile, US house prices, as measured by the Case-Shiller report, showed a slower gain in recent months, with the first deceleration in monthly prices since June 2013. New home sales, however, jumped 9.6% to 468,000 last month to their highest level in five years and ahead of expectations. The figures helped soothe recent concerns that the US housing market might be losing steam.
In Europe, better economic news buoyed sentiment, as a surge in exports drove the regions powerhouse economy in the final quarter of 2014. Gross domestic product in Germany grew by 0.4% quarter-on-quarter, leaving it 1.4% higher than a year earlier. Export growth had been the strongest in three years, with fixed investment growing for a third successive quarter.
Confidence in Germany also improved, with unemployment remaining close to the series low, while consumer and business sentiment rose to multiyear highs. GfK market research group said its forward-looking consumer sentiment indicator, based on a survey of around 2,000 people, rose to 8.5 going into March from an upwardly revised 8.3 the previous month, the highest reading since January 2007.
On the domestic front, Britain’s economic recovery broadened in the last three months of 2013, driven by a shift away from consumer spending towards investment and net exports. Gross domestic product rose by 0.7% in the fourth quarter, unrevised from an earlier estimate and in line with forecasts, capping off the fastest rate of full-year growth since the financial crisis. British consumer sentiment held steady in February, matching January’s elevated level, the highest in more than six years.
Technical analysis of the FTSE 100 illustrates the 14 year closing high the index achieved this week, although major resistance stemmed a chart break-out. The overbought oscillators are starting to weaken, indicating momentum is dwindling, yet the rising moving averages and the close above resistance suggests the next leg higher will occur shortly. Support is seen at 6690 and 6635, while a move above 6870 could provide the catalyst for further strength.
In conclusion, the market remains fickle, with sentiment subject to the ebb and flow of macroeconomic data and policy maker comments. The underlying strength in equities remains evident from stocks on both sides of the Atlantic pushing to record highs this week and whilst the FTSE looks vulnerable to some short-term profit taking, it feels like a matter of time before the all-time dotcom peak is tested.
The housing sector remains strong, quantified this week by full-year results from many of the UK listed house builders. The property market picked up last year after the government launched a scheme to help struggling house buyers to obtain mortgages, shoring up demand for new build properties.
Latest figures show British house prices rose by 8.4% in 2013, according to mortgage lender Nationwide. The building society said first-time buyer activity was continuing to recover, with an increase of 32% of people buying their first homes in the third quarter of 2013 than over the same period in 2012. A Reuters poll of 27 economists forecast house prices would rise by another 7% this year.
Taylor Wimpey (LON:TW.) is my current pick of the sector after it announced a 39% increase in operating profit to £313 million. The company completed 11,696 homes over 2013 and said it had already sold about 55% of its expected 2014 completions, with an order book of £1.49 billion.
The company that was created from the merger of rivals Taylor Woodrow and George Wimpey in 2007, said that it had benefitted from snapping up desirable land at low prices in 2009 and that muted competition to buy meant it was still acquiring land at prices that would achieve healthy returns, albeit at a slower rate.
As a result of strong profits and tempered land purchases, chief executive Pete Redfern said the firm will return an extra £250 million pounds to shareholders in dividends over the next two years. Taylor Wimpey said it would pay a £50 million special dividend in July 2014 and another £200 million pounds in July 2015, with plans for more after that. Meanwhile, it also increased its regular full-year dividend to 0.69 pence a share from 0.62 pence in 2012.
The outlook also looks strong, with mortgage approvals for house purchases jumping 57% in January to £8 billion, its highest level since the pre-crisis peak of the property market in September 2007. Redfern said: “There’s decent growth to come – there is plenty of gas in the tank.” But the firm is still targeting growth in London and has launched its new 800 home Chobham Manor scheme at the Queen Elizabeth II Olympic Park.
Taylor Wimpey trades on 12.4x this year’s earnings, which falls to 9.5x in 2015 as analysts expect 30% growth next year, putting it on an attractive PEG of 0.32. The annual yield is forecast to be 2.8% this year, although with three times earnings cover and news of forthcoming special dividends, it has room for expansion.
The chart of Taylor Wimpey demonstrates the strong trend the shares have followed over the past two years, with the 50-day moving average supporting any weakness. A blip for the sector this week has seen the shares move back to 120p, where it is likely to find support from the previous resistance level.
At the time of writing the share price is 121.2p and I believe the recent dip represents another buying opportunity for continued growth. Near term targets are seen at 127.3p, 134.1p and 149p, while a tight stop-loss below support at 117.6p could be used to contain any weakness.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Taylor Wimpey, but client accounts may. The material in this report has come from Simple Investments internal data sources, Simply Charts and Taylor Wimpey’s corporate website.