The world’s largest distributor of plumbing and heating products for professionals in the trade, Ferguson (LSE: FERG), has been an outstanding investment for shareholders who bought the stock in early 2009 after its post-credit-crunch collapse.
Back then, the firm was called Wolseley and the shares traded close to 850p. Today, after jumping up a bit on the release of the full-year results this morning, the price stands at 6,164p, as I write. That represents a more than 625% gain over the decade, plus dividends along the way – terrific! But is there more to come from the FTSE 100 company?
Consolidating the market
My last article on the firm was published in December 2016. I thought then the share price was ahead of itself at 4,936p and was worried about the intense cyclicality inherent in the business. I said: “If the macroeconomic outlook turns down, Wolseley’s shares will plummet.”
The big opportunity for investors in 2009 occurred because the share price had fallen more than 85% over 20 months. But it wasn’t an easy ‘buy’ because when the stock was at its lowest, and even when it started rising again, the news flow was grim – a case of news following price.
Ferguson is a highly cyclical business that’s steadily expanding by buying up smaller distributors in a fragmented market. Today’s full-year results report reveals, for example, the firm made 15 acquisitions in the year. However, one element of the company’s success is that it’s not afraid to nip and tuck the business for optimisation, and that strategy shows up in the six disposals during the period.
Ferguson earned around 92% of its profit in the USA over the trading year to 31 July, about 4% from the UK and around 4% from Canada. Yet despite such a large business in the USA, the company switched to a new corporate structure in May and moved its headquarters and tax residence from Switzerland to the UK. And, of course, the shares are listed on the London stock market, at least for now.
Demerging the UK operations
However, the directors announced plans in September to make the investing proposition even clearer by demerging the UK business under the Wolseley banner. When that happens, we’ll be able to invest with a focus on the UK plumbing market with one firm and the US/Canada markets with the other.
But is it a good idea to invest in Ferguson now? The forward-looking earnings multiple for the current trading year sits just below 15 and the anticipated dividend yield is around 2.9%. To me, that valuation shows little restraint and doesn’t seem to account for the cyclicality of the enterprise. Meanwhile, City analysts expect a low single-digit percentage increase in earnings this year.
At this level, and just like almost three years ago, I see too much downside risk and limited upside potential for the shares, so will be avoiding them for now.
