Wolseley and Ashtead in Trump trade trouble

Call me Ferguson

Wolseley, among the growing ranks of world-leading FTSE 100 companies that are not household names, is dropping the moniker entirely as it tries to keep last year’s momentum going.

Having risen 34% in 2017—one of the best advances by any blue chip—the shares pretty much stagnated until Tuesday, when they leapt to a ten-year high in reaction to reassuringly firm half-year results. The group has burnished its investment case further with a 6.7% year-on-year rise in revenues and 5% trading profit improvement to £515m—both at constant currencies—over six months to the end of January.

That means the group is growing well, looking beneath Britain’s sterling-related dramas.

So why have investors turned cautious?

Well for one thing, whilst sterling dramas contributed nothing positive to income, Wolseley suggests some of the 26.7% increase in headline EPS was due to foreign exchange movements, reflecting the fact that 84% of group trading profit is made by one company—U.S.-based Ferguson. (That also ties in with Wolseley’s reasons for switching names).

Furthermore, sales momentum continues to look poor almost everywhere outside of the states. In Canada and Central Europe like-for-like revenue was 1.4% lower including price inflation of 1.7%.

The UK was, predictably, one of Wolseley’s most challenged regions, with operating costs rising 3.5% and a £1m drop in trading profit, leaving the trading margin 10 basis points softer than in H1 last year.

Persisting sluggishness in the region accounts for the group’s decision to push ahead with the closure of 51 UK branches. Rising pensions concerns, a long-standing UK corporate bugbear, are another reason.

Greenback pain

Wolseley thereby demonstrates the benefits and risks faced by several large London-listed companies from a significant gearing towards the United States.

In Wolseley’s case, over 35 years, it built Ferguson into the preeminent brand and biggest distributor by volumes in North America’s plumbing and heating industry, giving the group a significant competitive and geographic advantage in America, and for many years, several other regions too.

Now, however, with the dollar 8% higher against a basket of major currencies since the beginning of last June and sterling and the euro hugging multi-year lows, Wolseley’s top line is under pressure.

In the UK this matters more after sterling’s post Brexit vote devaluation: the group almost certainly sources supplies outside of the UK in dollars and then faces an immediate price disadvantage when wholesaling in sterling.

The group had earmarked 80 UK branches for closure last September, with 800 potential jobs cuts, citing highly competitive markets here and tepid demand in property repair—namely in social housing. Negative currency effects give Wolseley another incentive to push ahead with a UK retreat. And having announced an exit from its Nordic business on Tuesday, investors will certainly wonder if it might, in time, retreat from the UK entirely as well.

Ashtead’s America

Wolseley’s dilemma is shared by a number of other large London-listed firms with a significant US focus together with businesses in Britain. Tate & Lyle, for instance, generated 78% of revenues in the United States in its year ending in March 2016. Engineer Meggitt, and business publisher UBM are among other mid-sized groups for which the U.S. is their best revenue-generating region, with sales of around 50%.

Wolseley’s fellow FTSE 100 U.S. construction stock, Ashtead, is even more dependent on North America, having made 80% of sales per year stateside from 2009 onwards.

All of these shares were Trumpflation plays before Trumpflation existed.

With 2016 gains of 20%-40% apiece compared to the FTSE 100 barely scraping 15%, U.S. ‘reflation’ sentiment has been evident in their advance. But as more wheels come off the Trump-trade—for instance after the U.S. administration’s failure to push through healthcare reform—investors are re-evaluating London-listed reflation proxies as much as they’re reexamining US stocks that surged on Trump hopes.

And, after last year’s surge most Trumpflation plays mentioned here have risen just a few percent higher to date.