Ferguson Earnings: On Track to Deliver Full-Year Growth Despite Slowing End Markets

After reviewing Ferguson’s FERG 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.

After strong sales growth during the first half of Ferguson’s fiscal year (ended Jan. 31), growth is now slowing due to a decline in residential new construction activity and moderating repair and remodel spending. That said, management said that high-end remodel activity remained resilient, which is interesting because we’ve heard the opposite from some building products companies. Nevertheless, Ferguson estimates that revenue tied to the United States residential market declined 6% year over year. U.S. nonresidential spending is also easing, but related revenue grew 3% year over year, supported by industrial and nonresidential waterworks projects. Management noted that the firm is seeing increased bidding activity related to mega projects too. Consolidated fiscal third-quarter sales fell 2% to $7.1 billion, in line with our expectations. We expect revenue will decline by a low-single-digit percentage year over year next quarter, but full-year revenue will increase 3.5%.

Adjusted operating margin narrowed by 110 basis points year over year to 9.2%; commodity deflation was a 30-basis-point gross margin headwind and operating expense deleverage was an 80-basis point drag on adjusted operating margin. We had been expecting Ferguson’s margins to moderate, and we consider a 9%-plus adjusted operating margin as a solid level of profitability. We forecast Ferguson’s full-year adjusted operating margin will be 9.6%, down 70 basis points from last year, but well above the firm’s five-year average (8.3% by our records).