Should I Buy Wolseley?


LONDON -- I'm shopping for shares again, and I'm anxious to get to the checkout. Should I pop Wolseley into my basket?

An ill wind
Cold winds from Europe continue to send shivers through the FTSE 100, with plumbing merchant Wolseley the latest to catch a nasty chill. Presenting the company's half-yearly results to the end of January 2013, chief executive Ian Meakins blamed its disappointing figures on "substantial headwinds in Europe". There was better news in its main market, the U.S., so should I buy Wolseley?

Meakins was reporting a drop in group pre-tax profitability of 20.4% to £199 million, which included £63 million of restructuring charges in its French business, where revenues fell 10.4%. Revenues also slipped more than 6% in the Nordic region, as the construction malaise spread across the continent. Europe strikes again! And once again, the U.S. remains a global bright spot. It contributes 51% of Wolseley's revenues, and like-for-like sales rose a healthy 8.3%. Canada grew 2.3%. The U.K. was broadly flat. Overall, reported group revenue fell 8.25% to £6.276 billion. These are tough times, even for good businesses.

U.S. and them
Management was keen to highlight its strong U.S. performance, where it enjoyed market share gains and productivity improvements. It completed four bolt-on acquisitions for £120 million in the U.S. and U.K., bringing in aggregate annual revenue of £245 million. Wolseley is streamlining its French operation, allowing to focus on markets where there are healthier profits to be made. Meakins was sufficiently confident to announce a 10% hike in the dividend, but said third-quarter trading would bring more of the same, with gains in the U.S., slippage in Europe. Cost-cutting has helped maintain margins.

Unsurprisingly, the Wolseley share price took a knock on the news. But this follows a strong run, up 30% over the past 12 months, against 8% for the FTSE 100 as a whole. Broker views are mixed. Deutsche Bank has lifted its target price from £31.97 to £34, and stands by its buy recommendation. Jefferies upped its target price by 40 pence to £25.40, some way short of the current market price of £32.09. These discrepancies are hardly surprising. Wolseley is a world leader in plumbing and heating products, but the world is going through a rough patch.

WOS (not WOS)
Forecast earnings-per-share growth of 9% to July 2013 and a robust 20% over the next 12 months look promising to me. I'd be happy to take a position in this stock, and hang on for the recovery, which I'm sure will come, as management appears to have a clear strategy. But two things hold me back. First, its lowly 1.9% yield, covered 2.8 times, although management does have a progressive dividend policy. My second worry is the valuation. Trading at a pricey 19 times earnings, investors are vulnerable to further cold winds from the continent.

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