Heating and plumbing products distributer Ferguson (FERG) continues to push on in the US, its biggest market. The company reported revenue growth in excess of 10% in its third quarter to 30 April, and 7.1% organic progress.
The group was originally called Wolseley but it adopted the name of its US division to reflect the importance of that market. Around 90% of earnings before interest, tax, depreciation and amortisation are generated in the US and Ferguson’s focus on the region appears to be paying off.
Ferguson made $334m in trading profit on $4.1bn of revenue in the US alone in its third quarter to 30 April representing a 20.8% and 11.5% year-on-year improvement respectively.
Shares has previously pointed to Ferguson’s US strength and its ability to return large amounts of cash to shareholders. The company is set to pay a $1bn special dividend soon that will be worth approximately 300p per share to investors, the company also confirmed today.
The market seems impressed by the performance, the company’s share price is up by 1.9% to £60.04.
EXITING LOW MARGIN BUSINESSES
Ferguson’s UK performance pales in comparison to that seen in the US. Revenue was down by 10.9% to $629m with profits slipping 29.3% to $23m due in part to closing branches and exiting lower margin wholesale businesses.
However, organic sales improved by 0.7% and the company says that operating costs in the core business have been reduced to restructuring.
Aynsley Lammin, analyst at broker Canaccord Genuity points to the steep decline in UK trading profit coming ‘despite higher UK gross margins’ suggesting that the UK repair, maintenance and improvement market ‘continues to look weak’.
UPGRADES EXPECTED
Analysts from Canaccord Genuity and Liberum expect consensus estimates to be upgraded following this strong third quarter update.
Charlie Campbell, analyst at Liberum, says ‘we continue to see the shares as undervalued given the rising importance of the US business, which is an unrivalled leader in its sector’.
Using Liberum’s forecasts, Ferguson is trading on 15.3-times 2019’s earnings which according to the broker is at a discount to the company’s US peers. These include Fastenal, Grainger, HD Supply, Home Depot, Lowe’s and Watsco which trade at around the 18.8-times range.
