Pipes and wires
When I reviewed plumbing merchant Wolseley (LSE: WOS) (NASDAQOTH: WOSCY.US) back in March, it was blaming a disappointing set of results on “substantial headwinds in Europe”. I thought 19 times earnings was too much to pay for a company that had just suffered a 20% drop in profitability. Would I buy it today?
The share price is down 3% since then, against an (equally underwhelming) 2% rise in the FTSE 100. Wolseley’s recently published Q1 results were solid, however, with underlying revenue growth up 7.4% for the year for its ongoing businesses and like-for-like sales up 3.5%. Trading profits grew 9% to £218 million. Wolseley can thank a relatively buoyant US market for that, with like-for-like revenue growth of 7.6%, boosting trading profits by $20 million to £142 million. Revenues rose 4.3% in the UK, helped by new residential construction, but fell 2.6% in the Nordics and 4.8% in France.
Lost in France
Wolseley has done well to protect its profitability, largely through tight control of its operating costs, especially in struggling markets. Gross margins rose slightly, by 0.2% to 27.6%. It even flushed out a £2 million profit in France, due to falling costs. But chief executive Ian Meakins was forced to put on his sad face when talking about Europe:
“So far there are no signs of improvement in market conditions across Continental Europe and we expect trading conditions to remain tough for the foreseeable future.“
For me, Wolseley’s cardinal sin is its lowly 2.1% yield, although investors will share in a £300 million special dividend in the next few days (on top of the recent £121 million ordinary dividend). Cash generation is strong, and Wolseley is investing in new technology to help it win market share. That should help fuel a projected 11% rise in earnings per share growth in the year to July 2014. The US is the key to future success, although Wolseley may also benefit from attempts to accelerate UK housebuilding, which have just got a £1 billion booster in Chancellor George Osborne’s Autumn Statement.
Blowing hot and cold
UBS has just named Wolseley a ‘buy’ due to its solid long-term growth prospects and stable earnings, calling it “a relatively low-risk investment in the context of the construction sector”. But it did reduce its forecasts, and frankly, I am lukewarm about this stock. At 17.5 times earnings, Wolseley is cheaper than it was, but it still isn’t cheap enough for me.
