Market has overreacted to one month’s slowdown in sales growth
New: Ferguson / LoopUp
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Full year results from FTSE 100 plumbing and heating distributor Ferguson (FERG) caused a bit of a share price wobble on 2 October as investors worried about a slowdown in growth. We think the market overreacted, presenting an opportunity to buy shares in a superb company at a cheaper price.
While the business formerly known as Wolseley isn’t very glamorous, it is growing fast and throwing off large amounts of cash. The aforementioned slowdown only referred to one month’s trading and, importantly, Ferguson continues to take market share.
Its biggest market is the US, which generates 80% of sales and 90% of operating profits, so the strong US economy has been a boon with Ferguson’s sales growing by 11% in the last year (10% on a like-for-like basis).
As well as selling plumbing fittings, Ferguson provides water-related products to utility companies and their contractors through its Waterworks unit – which accounts for 16% of group revenue.
Strong earnings enable Ferguson to re-invest in its business to grow market share. It does this by expanding its branch network and through low-cost bolt-on acquisitions.
As well as strengthening its presence in the US it has branched out into Canada, which is growing strongly and contributing nicely to profits.
After investing in the business, Ferguson aims to grow dividends in line with underlying earnings and if excess cash builds up it likes to pay it out to shareholders promptly.
This year, as well as lifting the normal dividend by 20%, the company paid out a special dividend of $1bn or $4 (300p) a share in June off the back of selling its Nordics business.
The weakest part of Ferguson’s business is the UK where sales were down in the last financial year as was the contribution to earnings. The infrastructure unit is performing well but sales to UK trade customers have struggled, so the company has closed branches, reorganised its logistics and exited the low-margin wholesale business completely.
The net effect has been to reduce margins further as costs are taken upfront but the benefits of a more streamlined operation should flow through in coming quarters.
The latest full-year results (sales up 7%, operating profits up almost 15%) were met with apathy by analysts but we recommend longterm investors focus on the strong fundamentals.
At £60.83 the shares trade on 14.6 times forecast earnings for the 2019 financial year which looks too cheap compared with 20-times for smaller US distributor WW Grainger.
The long-term value creation track record is superb with Ferguson delivering shareholders with a 312% total return (capital gains plus dividends reinvested) over the past decade versus 77% from the FTSE All-Share index.