The Taylor Wimpey [LON:TW.] share price has delivered a disastrous year-to-date performance. The FTSE100 housebuilder’s market value has declined by 50% since the start of the year as investors have priced in the impact of weak consumer confidence, rising interest rates and downbeat economic growth prospects.
While this trend may continue in the short run, the company’s long-term prospects remain relatively attractive. An ongoing supply/demand imbalance in the housing market, a large land bank in a concentrated industry and a low valuation suggests the firm has recovery potential. Meanwhile, its solid financial position means it has the capacity to overcome – and even take advantage of – a tough period for the wider housing industry.
Taylor Wimpey market position
Taylor Wimpey currently has a net cash position of GBP642m. This provides it with the means to survive even the very worst economic crisis and housing market bust that could take place in the coming months. Indeed, it could be argued that a tough period for the wider industry will strengthen the firm’s market position as smaller, less financially sound businesses struggle to a greater extent.
A slowdown in housing transactions and a fall in asset values also provides cash-rich companies with the opportunity to increase the size of their land banks. Indeed, Taylor Wimpey undertook a GBP500m rights issue in 2020 at the height of the pandemic to go on a land buying spree. A similar move, potentially funded by its own cash position, would be unsurprising in the near term should land prices become more attractive. This could lead to higher profits in the long run.
Taylor Wimpey operates in an oligopolistic market
Of course, the housing market is cyclical. It has always experienced booms and busts. Although its near-term growth opportunities appear limited due to impending interest rate rises that make homes less affordable, its long-term potential remains intact due largely to a lack of supply.
Over the past decade, around 145,000 new homes were built per year in England. While not every individual needs a home for themselves, England’s population is forecast to rise by 190,000 per annum between 2020 and 2030. This suggests that the supply/demand imbalance that has been present in the housing market over recent decades is unlikely to quickly unwind.
Moreover, Taylor Wimpey operates in an oligopolistic market where a small number of large firms control a significant proportion of the supply of new homes. A substantial fall in demand that is prompted by rising mortgage costs could mean they limit supply in the short run. This could support higher house prices and force the government to implement demand-side policies, such as new buying schemes, to help would-be buyers onto the property ladder.
Taylor Wimpey’s share price fall means it now trades on a forward price-to-earnings ratio of less than five. This suggests investors have priced in a turbulent period for the firm as evolving fiscal and monetary policies impact on the housing market and wider economy.
Clearly, there are risks ahead for the business and its investors. But with large amounts of cash, a solid market position and favourable supply/demand dynamics, the stock offers long-term recovery potential in return for short-term share price volatility.