Ferguson set out to clean up its balance sheet following the great financial crisis

Business Strategy and Outlook

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 2020, 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 32%. It is forecasted that the U.S. R&R spending to grow at a 4%–5% compound annual rate this decade. While R&R spending surged during the pandemic, and don’t think demand for home projects is set to stall. Instead, it is believed that the pandemic stepped sales up to a structurally higher base for more normalized growth going forward. In terms of U.S. residential construction, it is believed to have a 1.6 million-unit production pace is maintainable for much of the decade, and the forecast is 15.7 million cumulative starts between 2022 and 2031.

Ferguson has built leading positions across most of its end markets through its roll-up acquisition strategy. The company typically acquires local competitors, gaining access to new brands, suppliers, regions, and customers. It is expected that Ferguson will continue to this strategy, which should augment its scale-driven competitive advantage. Ferguson’s pricing strategy has transformed from being primarily localized to more standardized across the group over the past decade. In the past, branch managers had more discretion over pricing in order to react to local competitive dynamics. Today, the company employs a more disciplined approach to pricing, allowing it to take better advantage of its economies of scale. Ferguson sold its Wolseley U.K. business for approximately $420 million in February 2021. This business struggled to generate value for the group despite being one of the largest distributors in the United Kingdom. There were very few synergies between geographies and little overlap in suppliers. Ferguson’s strategic shift to the United States will be a tailwind for the firm’s prospects, and Ferguson’s primary listing on the New York Stock Exchange could increase interest from U.S. investors.

Financial Strength

Ferguson set out to clean up its balance sheet following the great financial crisis, and its improved net debt/EBITDA from 3.5 times before the 2008 crisis to 0.8 times as of Jan. 31, 2022. Net debt at the end of the second quarter of fiscal 2022 (January 2022) was $2.2 billion. Ferguson’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy that augments growth with acquisitions but also returns cash to shareholders. In terms of liquidity, it is believed that the company can meet its near-term debt obligations, given its strong cash balance. Its cash position at the end of the second quarter of fiscal 2022 stood at $828 million. It also found comfort in Ferguson’s ability to tap available lines of credit to meet any short-term needs. Also, it was encouraged by the countercyclical nature of industrial distributors’ free cash flow generation, which results from the ability to drawdown inventory during times of economic malaise. Ferguson generated over $1 billion of free cash flow during the great financial crisis, and is expected that the current economic weakness to push free cash flow levels materially higher as working capital requirements ease. Ferguson enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

Ferguson’s roll-up strategy in the U.S. should lead to market share gains, boosting revenue growth in excess of the market average.
Ferguson’s strategic shift to the U.S. away from international markets has strengthened group operating margins.
Ferguson generates strong free cash flow throughout the economic cycle despite serving cyclical end markets

Company Profile

Ferguson distributes plumbing and HVAC products primarily to repair, maintenance, and improvement, new construction, and civil infrastructure markets. It serves over 1 million customers and sources products from 34,000 suppliers. Ferguson engages customers through approximately 1,600 North American branches, over the phone, online, and in residential showrooms. In fiscal 2021, Ferguson derived 94% of its nearly $23 billion of sales in the U.S. According to Modern Distribution Management, Ferguson is the largest industrial and construction distributor in North America. The firm sold its U.K. business in 2021 and is now solely focused on the North American market.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.