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Building product distributor Ferguson plc (FERG +2%), which supplies plumbing, HVAC, waterworks, lighting, etc., to the residential and non-residential North American construction, repair, and remodel market, is giving investors something to write home about following its mixed Q4 (Jul) report. FERG toppled Q4 earnings estimates but came up shy of analysts' revenue prediction. Meanwhile, FERG's initial FY25 revenue guidance was mild, projecting low single-digit growth yr/yr. Even though this is a decent reversal from the 0.3% drop posted in FY24, it was still modestly below consensus.
By operating in the residential and commercial housing market, there has been no shortage of obstacles in FERG's path over the past few years. Throughout much of 2023 and seeping into 2024, the repair and remodel (R&R) industry has softened. Louisiana-Pacific (LPX), the world's largest producer of oriented strand board panels, commented last month that R&R spending remains constrained in light of elevated interest rates and economic uncertainty. At the same time, new residential housing starts have been muted for similar reasons, weakening during Q4. Even the silver lining for FERG, non-residential construction, has been sluggish, expanding sales by just 3% yr/yr in Q4.
However, investors are beginning to see the light at the end of the tunnel as the Federal Reserve changes course on its monetary policy, potentially cutting interest rates by up to 100 bps by year's end. An easing monetary policy lowers the cost of financing and may compel existing homeowners to begin upgrading, setting a more favorable housing market in motion.
- In the interim, market conditions are still uneasy. FERG delivered a 1.4% sales bump yr/yr to $7.95 bln, marking a minor deceleration from the +2.4% posted last quarter. Adjusted EPS of $2.98 represented a 7.6% expansion yr/yr, supported by a 40 bp improvement in adjusted operating margins to 10.8%.
- Residential end markets, which include R&R, were flat yr/yr in Q4 due to weak new construction and softer R&R activity. Conversely, FERG noticed healthy levels of non-residential bidding activity, which aided its minor sales growth in the segment and ultimately pulled overall revenue positive.
- Over a longer timeframe, FERG consistently delivers above-market growth, largely due to M&A. FERG constantly consolidates its fragmented markets through bolt-on and capability deals. The company gobbled up ten companies during FY24, closing four during Q4 alone. Management remarked that it continued to capture market share during Q4 across its residential and non-residential end markets.
FERG has many trends working in its favor, including an undersupply of homes, aging housing, and healthy non-residential large capital projects. As such, the market is less focused on FERG's relatively weak FY25 guidance and more focused on the potential for growth to begin accelerating throughout the next several quarters. However, after shares of FERG rocketed over +40% higher from November to April on the prospect of lower rates, these tailwinds may already be priced in, possibly keeping a lid on more significant appreciation over the near term.