Ferguson (LSE:FERG) is currently one of the most expensive stocks on the FTSE 100 index based on share price. Should I buy the shares for my holdings? Let’s take a look.
Heating and plumbing
So what does Ferguson do? Well, it is a support services business specialising in the manufacture and distribution of heating and plumbing products. It has extensive market share in North America, as well as operations here in the UK.
As I write, Ferguson shares are trading for 9,412p, making them the third-most expensive shares on the FTSE 100 currently. The only two companies whose shares cost more are AstraZeneca in second, and Spirax-Sarco, the most expensive.
At this time last year, Ferguson shares were trading for 9,432p meaning the shares are up close to levels seen this time last year. Recent macroeconomic and geopolitical pressures had sent the shares downwards since the turn of the year. The shares have dropped close to 30% from 13,105p at the beginning of 2022 to current levels.
Risk and reward
The aforementioned macroeconomic issues are a worry for me. Some of these issues include soaring inflation, the rising cost of raw materials, and the global supply chain crisis. Ferguson’s performance could be affected as more expensive raw materials could result in production costs increasing. This would squeeze profit margins. Furthermore, the supply chain issues could result in sales being affected as well if products cannot be delivered. Many other FTSE 100 businesses have come under pressure due to these issues.
So to the positives. Let’s start by taking a look at Ferguson’s performance. I do understand that past performance is not a guarantee of the future, however. Looking back, Ferguson has recorded excellent growth between 2018 and 2021 in respect of revenue and gross profit. The pandemic-affected year of 2020 saw levels drop on both fronts but this was the case for many businesses and considered an anomaly due to the pandemic. It still recorded a profit, however, unlike many other firms on the FTSE 100.
Favourable market conditions could boost Ferguson’s performance and returns, in my opinion. The housing market in the UK is burgeoning with demand outstripping supply, meaning heating and plumbing products will be high in demand. In the US, house prices in recent months have increased to levels not seen for approximately 30 years.
At current levels, Ferguson shares look good value for money on a price-to-earnings ratio of just 13. The index average is higher at 15. In addition to this, the shares would likely also boost my passive income stream through dividend payments. The shares currently have a yield of 2%. Of course, dividends are never guaranteed.
A FTSE 100 stock I’d buy
I believe Ferguson is a quality business on paper and based on its fundamentals. The majority of its profit comes from the US, which is the largest economy in the world. Having good market share here will enable it to continually perform well, in my opinion.
In summary, Ferguson shares look good value for money and performance seems to be consistent with further growth targeted ahead. This performance should underpin further dividend payments which would boost my passive income stream. I would add the FTSE 100 incumbents shares to my holdings.
