US housing market may hold key to Ferguson’s fortunes as firm releases bumper profits and dividends

Russ Mould
2 October 2018

“Sometimes management teams can be forgiven for wondering quite what they have to do to keep shareholders happy and Ferguson’s chief executive John Martin may be asking himself that very question today,” says Russ Mould, AJ Bell Investment Director. “The shares are down even as the plumbing and heating equipment specialist unveils strong growth in sales and profits and a 21% increase in its dividend payment to round out a year that also saw the firm pay out a special dividend and complete a £500 million share buyback programme.”

“Investors’ concerns seem to focus on the UK and a comment about September’s sales growth rate coming in a little below that of August.

“UK organic sales fell 0.1% year-on-year in the fourth quarter, the second drop in three, and by more than that, if the effect of branch closures and business disposals are taken into account.

Source: Company accounts. Financial year to July.

“However, a restructuring is already under way in the UK and it is by no means impossible that Ferguson could one day look to sell the operation, just as it disposed of its Scandinavian unit, Stark, and is now looking to sell its remaining Central European business, Wasco. 

“The UK represents just 5% of group profits so its contribution must also be kept in perspective. A powerful performance from the USA meant that overall group sales growth accelerated on an organic basis in the final quarter of the year.

Source: Company accounts. Financial year to July.

“Investors are therefore better off keeping an eye on the US operations, where organic growth reached 9.9% in the fiscal year just ended, compared to a 6% to 7% growth rate in Ferguson’s target markets.

“The housing, commercial, infrastructure and industrial markets all grew rapidly, which should not have been a surprise given the most recent US GDP growth numbers and the sugar rush provided by President Trump’s tax cuts.

“Residential represents half of Ferguson’s US sales and as such the housing industry is vital to the firm. 

“The good news, it could be argued, is that US new building permits, private housing starts and new housing sales are still nowhere near their pre-crisis highs.

“In August, permits came to 1.25 million (against the September 2005 high of 2.26 million), new starts reached 1.28 million (against January 2006’s peak of 2.27 million) and new housing sales of 629,000 is no higher than 1995 levels and miles below the July 2005 high of 1.39 million.  

“As such you could say that there is still so much to go for.

“Equally, the fact that activity levels are still so tepid relative to 2005-07 after a 10-year economic upturn would question whether those numbers will be seen again this cycle, especially as US interest and mortgage rates are now going up and house prices are back at record highs, based on the S&P/Case-Shiller index.

“These factors may explain why new building permit momentum looks to have slackened a little in the US over the summer, even if growth in housing starts and housing sales remained strong.

“As such, investors will need to stay alert, even if an eighth straight increase in the annual dividends suggests that the dark days of 2008-10, when the US housing market collapsed,  are well behind us.”

Source: Company accounts. Financial year to July.

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