Although the downturn in the US housing market is bad news for this plumbing and building materials company, Paul Hill believes it will be well-placed to benefit when the recovery comes:
Gamble of the week: Wolseley (WOS)
Wolseley is a member of the FTSE 100 and the world’s largest distributor of plumbing and bathroom products, central heating equipment (such as boilers) and building materials, particularly timber in Europe and North America. The group is the market leader in the UK (15% share), US (7% in plumbing and heating; 3% in lumber), France (12% share) and Austria (20% share).
Last week, the company released a trading statement for the 11 months to 30 June before entering its close period. Although fallout from the US housing market hit its North American business, overall group profits were still 2% higher than last year thanks to a good performance in Europe. The results were also adversely affected by lower US timber prices, dollar devaluation and one-off restructuring costs.
Nonetheless, even though analysts downgraded profit forecasts, the shares rose on the news because the City was relieved that the decisive actions taken early on in the downturn were now starting to bear fruit. Wolseley made 4,500 people in the US redundant at the start of 2007 and announced a further 370 job cuts last Monday.
Clearly, the tough economic conditions, as a result of higher borrowing costs and weaker property prices, are set to continue for the time being. But when greener shoots do start to sprout, Wolseley is well positioned to benefit. The board also expects to continue to make good progress in the non-US markets that account for around 75% of the company’s revenues. Moreover, the balance sheet remains robust, with gearing as of 30 June down to 78%, compared with 90% five months earlier, as a result of strong operating cash flow.
In the future, there is hope that performance will also be boosted by the UK government’s plans to build 70,000 affordable homes a year by 2010 – a 130% increase over 2004. Additionally, the recent devastating floods across the country – especially in the Midlands and Yorkshire – should also help near-term demand for its building-repair operations. Finally, this quality, albeit high-risk stock, now looks cheap on fundamentals – trading on a 2007 p/e of less than 13. Results for the year ending July are due to be announced on 24 September, with the City anticipating sales and earnings of £16.1bn and 89.7p respectively, rising to £17.1bn and 99.5p in 2008.
Recommendation: LONG-TERM BUY at £11.02
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments