Taylor Wimpey

TW - Taylor Wimpey - 24/4/08 - 130.6p - 9% of portfolio
New purchase today: Taylor Wimpey at 130.6p. I first looked at this at 151p last month, and was in two minds. I wanted to wait until the new tax year, but by then it had gone up, so I held fire.

Last night I adjusted my valuation downward because I've become more pessimistic about the future of the UK housing market, but still thought fair value was 215p. Yesterday they closed at 145p - a discount of 32%. I decided to take the plunge. By the time I got into work they were 135p. I checked the news - some negative noises from Persimmon, but nothing my valuation didn't take account of. By the time I bought it had hit 130.6p - a discount of 40% - perfect.

Once the housing market has crashed and is on the way back up again, Taylor Wimpey will be well placed. They've had practise coping with a crash in Spain and now the US, so hopefully they've got a good strategy worked out by now. They have a lot of debt, but this is secured on their monster land bank, so unlikely that this will cause them too many problems - I think they should have sufficient cash flow to reduce their debt over the next few years, even if they're not profitable.

After a few years of zero profit I expect TW to return to significant profit. In the meantime I think they can maintain cashflow by depleting the landbank - and a lean period of trimming costs will be no bad thing for the long term.

Hopefully the US market will begin to recover while the UK market is still in recession, so that diversity should help.

Upside
In a few years things should look very rosy.
Price to book value is extremely favourable. TW account for land at cost price, and they've held a lot of it for a long time, so it is probably even better than it appears.

Downside
It's going to be tough in the meantime. I may prove to have bought too early.
I expect the dividend to be cut or eliminated altogether for a couple of years.
Net debt of £1.4bn is too high for comfort. Would be nice if this was significantly lower to allow them to increase the landbank when land is cheap.

Future
Here is where I'd like to see the company in 5 years:
Earnings £400m after tax, EPS about 38p.
Net debt £1bn.
Dividend 20p.

At a P/E of 12 and a 4% yield, that means 456p per share for a 250% profit - an annual return of 30%, not including dividends. That would be nice :-)

Portfolio
Here's my portfolio breakdown at current values:

Finance: 28.7% (RBS)
High yield ETF: 21.9% (IAPD: 11.1%, IDVY: 10.8%)
Builders: 9.7% (TW)
Emerging ETF: 17.0% (IEER: 5.3%, LTAM: 6.1%, IFFF: 5.5%)
Chemicals: 4.4% (ZRX)
Software: 18.4% (BDI: 3.5%, EDD: 5.9%, MXM: 9.0%)

Star performer: LTAM up 20%.
Biggest dog: BDI down 30%.

Zirax went up to 12p before I could buy more at 11p... I'm hoping it will go down again.