Stock of the day: Ferguson key for repairs after U.S. storms

Ferguson is the Number 1 distributor of plumbing materials in the U.S., but despite topping the FTSE on Tuesday, is a relative unknown in the UK.

Once a Wolseley

Ferguson is the Number 1 distributor of plumbing materials in the U.S., but despite topping the FTSE 100 on Tuesday, the British company is a relative unknown here. There’s a chance it will now get more familiar though, after announcing 25% rise in annual trading profit and a £500m share buyback. Additionally, we see a further increment of medium term growth from advantageous positioning as work to repair recent storm damage gears up.

Public awareness is an issue for any company seeking to widen its investor base, but we consider it a relatively small one. Ferguson was called Wolseley for decades, but still grew to be the largest player in its U.S. market, where it now makes 89% of trading profit. The key is not necessarily wide public awareness, but rather recognition in relevant industrial and trade spheres. It’s difficult to see how it could have grown large enough over 35 years in the States to dominate the market without a reputation that carries.

Promising progress

Outside of the U.S. however, Ferguson has recently struggled in key regions. The UK has been predictably one of Ferguson’s most challenged. Operating costs rose 3.5% with a £1m drop in trading profit year on year by the H1 point. And the company’s other important areas around the world, Canada and Central Europe saw like-for-like revenue drop 1.4% in the first half. The group decided to cut some losses by closing 51 UK branches. It is also completely exiting the Nordics.

Ferguson’s weak regions have made the stock volatile this year, sending them as much as 10% lower by the end of August. They’ve now recouped that loss and are now modestly higher in 2017. The key to further underlying share strength though, beneath the flattering effect of the buyback, will be the extent to which Ferguson has put the impact of soft profits and operations behind it. Signs are promising. The UK returned to growth in the remainder of Ferguson’s financial year leaving revenues up 0.8% at constant exchange rates. The U.S. rose 10.4% and Canada and Central Europe were up 5%. The UK still lagged, to be sure, with heating “pretty weak”. A further drag on top of a £40m charge, but trading profit was still up 2.7%.

A key part for repairs

In the States sales accelerated to 8.8% in Q4, inching past the third quarter’s 8.6%, possibly reflecting a lift in demand as large swathes of Texas, Louisiana and Florida begin to rebuild and repair. With 45% of revenue in the residential segment, Ferguson will be the go to wholesale supplier for many needs. Beyond the one-off fillip, the outlook in the States remains firm, albeit current revenue growth has got off to a softer start, at around 6%.

The key risk is that the slow start turns into weak quarter. Either way, we expect restructuring savings to underpin outcomes from here, whilst noting distinct U.S. seasonal variations in demand. The group’s Q1 statement, scheduled on 5th December will be a major decider of whether the stock can hold gains into year end.

Technical spec

For now, Ferguson stock is backed by an orderly rise since Q1, largely validating a rising trend line. (See price chart below). Breaching of both 200-day simple moving average (SMA) and 21-day exponential moving average (EMA) in recent sessions shows turns in both long- and short-term trends. This offers a good backdrop for fresh attempts at cycle highs between 5175p and 5285p. Sustaining such heights could be a problem as momentum begins to stretch, admittedly. On the downside, if the 200-day MA doesn’t hold, we would see support between the 4733p to 4748p consolidation zone, though a fall to the lower bound would imply a loss of the trend. Such an eventuality is not our base case, but would temper our view on the stock considerably.

DAILY CHART: FERGUSON PLC.


Source: Thomson Reuters and City Index

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