The best bits from Ferguson's Q1 results

Shares have sprung a leak, so our head of markets looks for positives in these quarterly results. 

Plumbing supplies giant Ferguson (LSE:FERG) is setting its sights on events of larger strategic importance. The demerger of Wolseley is on track for 2020 and, in the meantime, this trading update serves to underline where the real strengths of the group currently lie.

The US business largely carries the group, so that when the planned demerger is completed next year, the UK operation in the form of Wolseley may find the going rather tough. 

Indeed, in the company’s first quarter, the UK’s revenues slipped by over 4% and trading profit dropped 17%. While this unit accounts for just 9% of revenues – and thus its slack is more than offset by the US arm – general uncertainty in its core revenue streams along with a challenging market environment has led to a necessary focus on cost control. 

For the wider group, the demerger will be a distraction, exacerbated by the group’s appetite for further bolt-on acquisitions. 

Source: TradingView Past performance is not a guide to future performance

The company may be well-versed in such acquisitive growth, but there is an ever-present element of execution risk which, coupled with any signs of an economic slowdown in the US, would put pressure on performance in 2020. The escalating trade spat between the US and China could have far-reaching effects on the global economy and Ferguson would not be immune from the shockwaves.

More positively, at the current time the US is exhibiting modest growth against concerns of potential wage inflation and a lessening demand. Accounting for 85% of the group total, revenues grew by 6.2%, which contributed to an overall revenue increase of 5.3% and an underlying trading profit increase of nearly 5%. 

The company’s ability to generate cash has meant that the $500 million share buyback programme is largely complete and expected to be fully over the line by the end of this year. While this has been supportive to the share price, the current dividend yield of around 3% is not one to shoot the lights out, although it is adequately covered.

In its current form, Ferguson is making good progress, as recognised by a share price which has added 33% over the last year, as compared to a 3.2% hike for the wider FTSE 100 index, and 30% in the last six months alone. This outperformance has been driven both by operational success as well as the perceived additional value which the demerger will unleash. 

The separation of the US and UK businesses makes strategic sense but will result in a rather different offering for investors. In the meantime, and given the recent price strength and some tough comparative quarters to follow, the shares are being seen as up with events. As such, the market consensus has recently slipped to a ‘hold’, albeit a strong one.

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