Investment Column: Outlook is bad for builders like Barratt

Autonomy; Dewhurst
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The Independent Online

Our view: Sell

Share price: 96.5p (+1.05p)

Housebuilders have had a torrid time of late. The FTSE All-Share Household Goods index, which, curiously, lists leading housebuilders alongside the likes of Reckitt Benckiser, is down more than 7 per cent since 26 April, while Barratt Developments is down more than 20 per cent since the beginning of May.

Viewed in light of Barratt's trading performance – the last update was encouraging – this seems odd, to say the least. But as the weakness has hit the sector as a whole – Persimmon and Taylor Wimpey, for instance, are also down sharply in recent weeks – we think the cause is anything but company specific; instead, we'd peg the declines to fears of another housing market slowdown.

Though the European debt crisis is likely to have played a part in the recent slump, the latest house price surveys from the Nationwide and Halifax didn't help matters. The former showed that the pace of growth in prices had relaxed last month, while the latter suggested that prices had fallen for a second consecutive month over May. With the government stepping up moves to cut spending, there are worries that the picture will only get worse in the months ahead. And as if the looming fiscal squeeze wasn't enough, the housing market still faces historically tight credit conditions – mortgage approvals remain subdued.

That said, investors will rightly wonder whether the recent pullback has opened up a buying opportunity in Barratt. Net asset values per share stand at above 200p, according to JP Morgan Cazenove, while the stock trades at under 100p. Metrics like that would suggest that it is indeed time to buy, and that is certainly what numerous City analysts seem to think. We disagree. We think market sentiment is far too fragile and Barratt and its peers, through no fault of their own, could continue to weaken in the near term. Sell.


Our view: Buy

Share price: 1827p (+59p)

Autonomy may not be a familiar name to many consumers but it is a British technology success story and the country's largest software company. The group provides its corporate customers with technology systems that allow them to structure and search information from emails and instant messages to voice calls and videos.

Part of the company's stellar growth has been down to a series of smart acquisitions and yesterday it announced another one. The latest deal is to buy the information governance business of CA Technologies – although it is not big enough to have a material impact on the operation's 2010 profits – the deal further strengthens the group's presence in the legal, regulatory and investigative markets.

Autonomy's software may not be sexy, but it is increasingly crucial as demands for transparency and regulatory oversight are at all-time highs. Put simply, chief executives want to cover their backs and will happily spend to do so. Clients are beginning to spend on bigger projects as well, Autonomy revealed recently. The group has also moved into the social media space with the recent announcement of software designed to monitor, govern and protect organisations as employees' social media habits increase. Panmure Gordon has the stock on a price 16.4 times estimated 2011 earnings, and given its strength and edge in the sector, we reckon it is worth having to add more to the portfolio. Buy.


Our view: Buy on weakness

Share price: 202.5p (-12.5p)

Ordinarily we'd be keen to support a company like Dewhurst, for a number of reasons. The supplier of quality components to the lift, keypad and rail industries is a manufacturer that still makes products in Britain.

It also said yesterday that profits were rising: turnover was 1 per cent down at £17.8m in the half-year to end-March, but profit before tax rose 3 per cent to £2.18m. Weakness in Europe and America was offset by strength in Asia and Australia.

We also commend the company for its honesty. While others who draw revenues from Britain's public sector have been furiously coming up with explanations as to why they won't be affected by the forthcoming spending squeeze, Dewhurst warned that revenues will be impacted in the second half and said that the private sector can't be relied upon to pick up the slack, at least in the short term.

The outlook for overseas business is uncertain and dependent on the economy. So, wait until the shares have settled at a lower level then buy. You can at least be sure that the company's progress reports will be reliable.