Ferguson recovery springs a leak
4th December 2018 10:06
by Richard Hunter from interactive investor
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A bounce back from an autumn sell-off has hit a snag following these first quarter results. Richard Hunter, head of markets at interactive investor, explains reaction to the numbers.
Plumbing supplies giant Ferguson has made a strong start to the year, which should restore some confidence to what has proved to be a difficult few months of trading, even though the initial share price reaction reflects the ongoing fragility of sentiment.
The cautious outlook and a stuttering UK performance at the full-year results in early October prompted a sharp decline in the shares, which stand 20% lower since.
Even now, there may be concerns regarding any slowdown in the US housing market, while the UK part of its operations, which currently represents 11% of revenues, remains finely balanced. In addition, acquisitions in the quarter totalling $284 million present further integration risks, while restructuring costs in the UK continue to linger.
However, the group's previously cautious tone has dissipated, and with some reason. The fact that the company changed its name from Wolseley to Ferguson was acknowledgement of how the business is positioned, with the US market, accounting for 83% of revenues, performing extremely well.
Source: TradingView (*) Past performance is not a guide to future performance
Of additional comfort is that trading in Ferguson's main market looks set to continue this growth in the months ahead, leading to confirmation of the company's full-year targets. A modest contribution from the UK and impressive growth in Canada have added to the optimism, with overall revenues in the quarter having risen 8.5%, trading profit 9.9% and some improvement also seen in the gross margin.
The lack of any comment around shareholder returns and a dividend yield of just 2.8%, despite the strength of the balance sheet, are potentially weighing on the shares, which have dropped 3% over the last year, as compared to a fall of 3.8% for the wider FTSE 100.
Even so, the company's conservatism could prove to be a prudent course in the face of any slowdown coming from the US, with the general market view of the shares as a 'buy' tending to support that view.
*Horizontal lines on charts represent levels of previous technical support and resistance.
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