Ferguson: The big overhang damaging the share price

Our head of markets explains why the situation for Ferguson will take a few months to become clear.

Any current signs of a faltering US economy are not affecting Ferguson (LSE:FERG) in any meaningful way, although the spectre of a slowdown remains, as evidenced by the initial share price reaction to these third-quarter numbers.

Previous concerns around wage inflation and lessening demand in the company's core US market, which accounts for 85% of revenues, have been answered by a year-on-year revenue increase of 8.4%. 

Indeed, the announcement of a new share buyback scheme of $500 million is both a sign of confidence in the company's future cash generative abilities, as well as recognising that the capital is best returned to shareholders at the moment as opposed to any obvious reinvestment requirements in the business.

With group revenues rising by 6.2%, gross margins improving and cost control also moving in the right direction, this is a company which is currently in control.

The financial year to date figures are also impressive, with revenues ahead by over 8% and more recent acquisitions already making their own positive contribution. Meanwhile, the company is continuing to grow market share in the US where order book growth remains in evidence.

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

A more challenging environment in Canada, where the government is attempting to restrict mortgage credit, is a concern, although the country is only responsible for 4% of revenues. 

Similarly, the pressure on trading profit in the UK (11% of revenues) due largely to currency headwinds was somewhat offset by a tighter rein on costs. 

From an investment perspective, and despite the supportive buyback programme, the dividend yield of 2.8% is not of particular attraction given the overall interest rate backdrop.

The chief concern overhanging the shares is the imminent fate of the US economy, where the situation will become clearer over the next few months as the Federal Reserve stands ready to assist if necessary.

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Even so, Ferguson is plotting a prudent course and the shares have responded of late, having risen 11% over the last six months. The picture is less positive over the last year, however, where a 9.3% decline compares to a 5.2% drop for the wider FTSE 100 index. 

As such, whilst the share price has some catching up to do, the company is displaying signs of being prepared for tougher economic times and the market consensus of the shares as a 'buy' seems safe for the time being at least.