Company Reports

Ferguson’s fiscal fourth-quarter (ended July 31) financial performance was largely in line with our expectations. While reported revenue growth of 1.4% fell a bit shy of our projections, Ferguson’s profitability was better than we anticipated with adjusted operating margin expanding 40 basis points year over year to 10.8%.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Ferguson's exposure to the US RMI market (as a percentage of sales) increased from 31% in 2008 to 60% in 2023, while US new construction revenue exposure decreased from 58% to 40% over the same time period.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Ferguson's exposure to the US RMI market (as a percentage of sales) increased from 31% in 2008 to 60% in 2023, while US new construction revenue exposure decreased from 58% to 40% over the same time period.

There were no surprises in Ferguson’s fiscal third-quarter results (ended April 30). While reported revenue growth of 2.4% came in a tad below our forecast of 3% growth, Ferguson’s 30.5% gross margin bested our forecast by 50 basis points. Stronger operating margin and lower interest expense led to Ferguson’s adjusted EPS of $2.32 beating our projection by approximately 6%.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Ferguson's exposure to the US RMI market (as a percentage of sales) increased from 31% in 2008 to 60% in 2023, while US new construction revenue exposure decreased from 58% to 40% over the same time period.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Ferguson's exposure to the US RMI market (as a percentage of sales) increased from 31% in 2008 to 60% in 2023, while US new construction revenue exposure decreased from 58% to 40% over the same time period.

Ferguson’s fiscal second-quarter results (ended Jan. 31) fell short of FactSet consensus expectations amid muted end market demand. Revenue of $6.7 billion declined 2% year over year and was roughly 1% below consensus expectations, and adjusted EPS of $1.74 was 9% lower than last year and 4% below the consensus estimate. These results aren’t particularly surprising, though, given that repair and remodel spending began to soften in the United States during the spring of 2023 and has yet to rebound. Furthermore, US single-family housing starts declined 6% in 2023. Ferguson’s nonresidential end markets remain more resilient but are slowing, as well. During the fiscal second quarter, Ferguson’s US nonresidential revenue declined 1% compared with a 4% decline in residential revenue.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2022, Ferguson's exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 40%.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Ferguson's fiscal first-quarter results (ended Oct. 31) were in line with our expectations. Management is executing well in a softer demand environment across residential new construction and repair and remodel, while commercial markets have been more resilient. Revenue declined 2.8% year over year to $7.7 billion. Organic revenue fell 4.9% and foreign exchange was a 10-basis-point headwind, but acquisitions added 220 basis points of revenue growth. Gross margin decreased 30 basis points to 30.2%, primarily due to price deflation for commodity products, such as copper tubing and PVC pipe. Nevertheless, management sees neutral pricing for the year, and we believe Ferguson can maintain at least a 30% gross margin over our five-year outlook. Adjusted operating margin of 10% was 90 basis points lower than the prior-year period, but that's still a strong level of profitability, in our view.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2022, Ferguson's exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 40%.

Ferguson’s fiscal fourth-quarter results (ended July 31) came in ahead of our expectations due to greater revenue contribution from acquisitions and resilient gross profit margin. Total reported revenue fell approximately 2% year over year (versus our expectation for a 4% decline) and adjusted operating margin of 10.4% was 90 basis points above our projection.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2022, Ferguson's exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 40%.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2022, Ferguson's exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 40%.

After reviewing Ferguson’s fiscal third-quarter results and 2023 outlook, we’ve raised our fair value estimate for the New York Stock Exchange-listed shares approximately 2% to $141 per share, primarily due to the time value of money. The change in the GBP/USD exchange rate since our last update (1.24 versus 1.26), along with time value of money, caused us to raise our fair value estimate for London Stock Exchange-listed shares about 4% to GBX 11,400.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2022, Ferguson's exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 40%.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2021, Ferguson's exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 40%.