BEAR POINTS
Exposure to weak US housing market
Profits falling
Slowing growth in Europe
Fewer acquisitions may depress profits
BULL POINTS
Attractive dividend yield
In decent financial shape
Wolseley is the world's largest supplier of heating and plumbing materials, with annual sales of over £16bn, and 79,000 employees serving customers through 5,000 branches in 28 countries. But around 60 per cent of the group's profits come from its US operations. So a savage downturn in the US housing market has translated into a 48 per cent fall in the share price from its peak in February 2007.
The question is whether the share price is now discounting all the bad news. The signs are not encouraging. Indeed, a company trading statement covering the last five months of 2007 makes miserable reading. Sales in the US fell 10 per cent and trading profits fell by 40 per cent, while profits in Europe were up just 1 per cent.
The US operation, Ferguson, did improve its market share (it is already the largest plumbing supplies distributor in the US), but the size of the market shrank. That was caused not just by a drop in new housebuilding, but also by a contraction in the repair, maintenance and improvement market. The big problems came at Stock, which provides building materials mainly for professional contractors, and where organic sales volume slid by 26 per cent year-on-year. As a result, US trading profits of £45m for the last five months of 2006 turned into a loss of £25m in 2007.
And the outlook is little better. Housing starts in the US have fallen 26 per cent from a year earlier to just 1.19m, and some analysts expect the rate to fall below 1m in 2008, perhaps as low as 700,000.
| WOLSELEY (WOS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 709p | MARKET VALUE: | £4.69bn | |
| TOUCH: | 708-710p | 12-MONTH HIGH: | 1,407p | LOW: 641p |
| DIVIDEND YIELD: | 5.0% | PE RATIO: | 17 | |
| NET ASSET VALUE: | 522p | NET DEBT: | 72% | |
| Year to 31 Jul | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2004 | 10.1 | 559 | 68.1 | 23.8 |
| 2005 | 11.3 | 665 | 81.6 | 26.4 |
| 2006 | 14.2 | 769 | 90.8 | 29.4 |
| 2007 | 16.2 | 634 | 73.5 | 32.4 |
| 2008* | 16.1 | 528 | 42.1 | 35.6 |
| % change | -1 | -17 | -43 | +10 |
*Morgan Stanley estimates | ||||
for a guide to the terms used in IC tip and results tables
Equally worrying are signs that the slowdown is starting to bite in Wolseley's European operations. Currently, the picture is mixed. Year-on-year, European sales rose 17 per cent in the last five months of 2007 thanks to a resilient performance in the UK and Ireland, and the £1.34bn acquisition of Denmark's DT, a building materials specialist, in September. Without this, operating profits fell 20 per cent, mainly as a result of poor trading in France, while a new computer system played havoc with trading in Austria.
Against this gloomy background, the management has been busy trimming costs, mainly through redundancies. It has also scaled back on its store opening programme, and planned capital spending of £500m has been pruned back to £400m.
Looking further ahead, Wolseley remains in good shape and will almost certainly bounce back when the economic slowdown has run its course. Meanwhile, its financial position is strong enough, with £1bn of unused lending facilities. The only near-term repayment is due at the end of March on E500m (£342m). Of the remaining debt, there are two covenants in place, neither of which would be breached unless EPS fell by 25 per cent from current estimates. For the rest, EPS would have to fall by 47 per cent. So, while its financial position is relatively secure, covenant risks may still inhibit Wolseley from fully exploiting acquisition opportunities.
