Why did the Barratt Developments share price fall despite strong results?

Typical street lined with terraced houses and parked cars

Yesterday saw the release of the full-year report from Barratt Developments (LSE:BDEV). Although there were several points to be positive about (in my opinion), the shares fell. The Barratt Development share price closed Wednesday down at 738p, but had dipped close to 700p during yesterday afternoon. This raises the question of whether this is a dip worth buying for my portfolio right now, even though it’s up 33% year-on-year.

Reasons for the fall

The full-year results for the year ended 30 June were always expected to be strong. The UK property market has enjoyed a bumper period recently, despite the impact of the pandemic. In fact, house prices are up 11% over the past year, according to the monthly House Price Index (HPI) report for August.

So even before reading the report from Barratt Developments, there’s already one reason that can be pointed to for the fall in the share price. When investors are expecting strong earnings, the bar is set high. I’ve seen it plenty of times before when optimism was already built in to the share price before results hit. The price then falls as even good results don’t match up to expectations.

Results showed a 37.3% increase in home completions versus last year. This increase was also coupled with a higher margin made on these revenues. The gross profit margin came in at 21%, up 3% from the level of last year. Ultimately, this all contributed to a very healthy profit before tax of £812.2m for the year.

Aside from the above results not quite hitting the high bar that the market set, there were some reasons for concern about the numbers. Higher build costs of 4%-5% were noted, something that the business expects to continue. It also said private reservations going forward were lower than expected, likely tying in with the changes to the stamp duty holiday.

These concerns were a contributing factor to the short-term fall in the Barratt Developments share price.

Looking forward on the share price

Clearly, the outlook going forward seems to be less rosy than the year just gone. I do think that the headwinds noted could hamper growth over the next year. These would be the main risks that I see for the shares at the moment.

However, let’s not forget that even with those negative impacts, the company is still growing at a great pace. Revenue was up 40.7% versus 2020, with operating profit up 64.4%. Even if growth slows, the forward order book looks strong enough to provide a good year into 2022. 

In the eight weeks of trading in the new financial year, total forward sales are up 6.3% on the same period during the previous financial year. Therefore, although I don’t think the Barratt Developments share price will rally another 30% over the next year as it has done already, I think steady share price growth could be seen.

On balance, I would consider buying shares in the company as a low-risk stock to add to my portfolio.

The post Why did the Barratt Developments share price fall despite strong results? appeared first on The Motley Fool UK.

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jonathansmith1 and The Motley Fool UK have 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.

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