The reason many property stocks have outperformed the market in the past 12 months is anticipation of a revival of the housing market. With the rise of many well-known builders and materials suppliers, investors may be questioning whether, or not, there's still value to be found in property, building and construction stocks.
It's important to understand the market cycle can last for many years and although share prices might be quite rich, they could still hold value for long-term investors.
For example, Fletcher Building Limited's (ASX: FBU) share price has underperformed its peers in the last 12 months, but looks likely to outperform the market in 2014. According to Morninstar's analyst earnings consensus, earnings per share is expected to be 54.3 cents in 2014 – putting the stock on a forwards price-earnings ratio of just 15. In the next year, the market is also expecting a slightly higher dividend.
Another builder which is expected to grow earnings significantly is Peet Limited (ASX: PPC). Trading at 22 times earnings it may appear a hefty price to pay but given the low interest rates on offer, many would-be homeowners will be back in the market. Analysts are predicting earnings to double by 2016 and rise by over 70% in FY14. It has a PEG ratio of 0.3 (less than 1 means the stock could be undervalued).
Another property developer, Mirvac Group (ASX: MGR), will also be welcoming lower interest rates and demand for new properties. Mirvac's share price has drifted sideways since the GFC, but net profit is likely to grow in FY14 and stymie the increasing number of shares on offer.
Building materials supplier, Boral Limited (ASX: BLD), is also looking to cash in on the increased construction activity currently underway. It trades around $4.70 per share which is quite reasonable given its ability to leverage growth in overseas markets. It operates primarily in Australia but has operations in Asia and the United States.
While there are some builders and materials suppliers which trade on reasonable earnings ratios and look likely to grow in 2014 and beyond, others appear to have growth fully priced in. For example, James Hardie Industries plc's (ASX: JHX) leverage to a US housing recovery appears to have been fully appreciated, with investors buying up the share price to over 90 times FY13 earnings.
Foolish takeaway
These companies are yet to realise the benefits of low interest rates and a revival to property markets. The demand for property can take a long time as individuals and businesses react to cheap credit on offer, as such investors should be positioning themselves to benefit. At current prices Peet looks most likely to outperform the broader S&P/ASX 200 Index (ASX: XJO) (^AXJO) in 2014.
