EUR 850.00 For Business Accounts Only

Morningstar | Ferguson's 3Q Shows Softening in U.S. Demand As Expected; Shares Fairly Valued

Following no-moat Ferguson's third-quarter results, we are maintaining our GBX 4,500 and USD 5.90 fair value estimates for the local and ADR shares, respectively. Earlier this year, management lowered expected organic growth for the year, citing a slowdown in the U.S., the company's largest market. This downturn in growth was visible in Ferguson's third-quarter results, with the U.S. year-over-year organic growth slowing to 3%, about one third of the growth rate achieved in the first two quarters of the year. The U.S. business has been growing at peak cycle rates for the past few years, and the more moderated growth posted this quarter is in line with our expectations going into the year. Shares look fairly valued.

Ferguson's gross margin increased by 20 basis points in the third quarter, while the group EBIT margin was down about 26 basis points year over year. We are not expecting further weakness in the margin because of the company's ability to reduce labour costs in the short term and relative to the previous downturn, the improved market share this time, namely through acquisitions, lowers the company's exposure to pricing competition in many of its local markets.

Further, after years of trimming its international businesses to focus more on its core market, the U.S., Ferguson comes into this slowdown during the cycle in a stronger position. Exiting international businesses has reduced some margin risk at the group level because previously at least one quarter of Ferguson's revenue came from international businesses turning out anemic profit margins, diluting its strong U.S. margin. Today international businesses contribute roughly 10% of revenue.