Shares in plumbing and heating supplies firm Ferguson (FERG) shed 6% to £50.50 after its third quarter results signal a slowdown in the US market.
Group revenues for the three months to 30 April rose by 6.2% to $5.27m thanks to organic or underlying growth of 2.7% and a 3.5% uplift from acquisitions.
READ MORE ABOUT FERGUSON HERE
The US market, which makes up 85% of sales, saw revenues grow by 8.4% to $4.46bn due to organic growth of 3.3% and 5.1% growth from acquisitions.
UK revenues fell by 6% to $567m as organic growth of 2.8% was offset by a strengthening of the dollar which reduces the value of sales in sterling.
Sales in Canada, Ferguson’s smallest market, fell 2.9% on an organic basis to $250m, partly on US dollar strength and partly on slower residential housing demand due to higher interest rates and government efforts to limit credit.
US GROWTH ‘MODERATING’
Ferguson is growing faster than the plumbing and heating-supply market in the US, meaning it is increasing its market share, but part of that is due to the fact that growth rates have ‘moderated across the country’.
It says that recent results for its largest quoted suppliers - which include firms such as AO Smith, Masco and Whirlpool - were flat in the first quarter of 2019 compared with an 8% growth rate in the same period a year ago.
According to the US Census Bureau, which measures building activity, new housing starts and residential construction put-in-place fell during the first quarter. On top of this, commercial construction got off to a slow start with ‘very modest growth’.
DOWNGRADES IN THE PIPELINE?
The company is cutting costs and third-quarter trading profits edged ahead of last year by $12m to $359m.
However, analysts at Canaccord Genuity caution that ‘the update will not assuage fears about a macro(-economic) slowdown in the US and if anything consensus is likely to edge lower’.
The company says it expects to generate full year ongoing trading profits ‘in line with analysts’ consensus forecasts’. According to Ferguson's website (here), the current consensus is $1.585bn compared with $1.507bn last year.
In the first nine months, trading profits amounted to $1.1bn which means that to meet analysts’ forecasts the company has to make profits of $485m in the current quarter compared with around $450m a year ago.
Given that almost all of its trading profits come from the US operations, which are clearly seeing a slowdown in demand, forecasts may well ‘edge lower’ as Canaccord’s analysts suggest.
NEW BUYBACK PLANNED
On a positive note, cash generation was strong and the balance sheet remains solid so the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) has stayed at 0.9 times, well within the group’s ceiling of two times EBITDA.
This means that, as well as having the flexibility to make small bolt-on acquisitions, which typically amount to $200m to $300m, the company can return surplus cash to shareholders.
Today it has announced that it will buy back $500m of its shares over the next 12 months, adding to the $3.5bn of cash returned to shareholders over the last six years.
