Ferguson and Travis Perkins

“Markets in Europe took a step back on Tuesday following a strong start to the week. The FTSE 250 index of mid-cap companies slipped 0.2% while Germany’s Dax index dropped 0.5%. The exception was the FTSE 100 which stayed flat as gains in consumer goods stocks were offset by weakness in miners,” says Russ Mould, Investment Director at AJ Bell.

Ferguson

“Despite renaming its business from Wolseley to Ferguson last year to reflect the importance of this US brand, the plumbing and heating products distributor can’t entirely escape the problems dogging its UK division.

“Revenue and profit from this part of the group was down markedly in the first quarter of the current financial year.

“Although this shouldn’t detract from a strong showing for the substantially more material US arm, it does leave the company’s fortunes very much tied to the American economy, even if it is also looking to expand in Canada.

“For now, a relatively buoyant US picture is sustaining solid growth. However, there are some worrying signs in the US housing market which could have an impact on demand.

“Recent data showed pending home sales in the US at a four-year low and forecasts for 2019 look fairly pessimistic.

“Ferguson remains positive for now, expecting growth to continue in the months ahead, but investors will be watching closely to see if this optimism wanes as we move into next year.”

Travis Perkins

“Travis Perkins is the latest company to follow the ‘leaner and meaner’ restructuring model. It has revealed plans to sell its Plumbing and Heating division, which accounts for approximately 13% of forecast trading profit for the current year. Analysts think it could be worth £400m to £500m.

“The overall strategy is to sharpen its focus on trade customers. The decision to hang on to its DIY chain Wickes may therefore seem a bit strange given it is a consumer-facing business. However, small trade customers account for approximately one third of its sales and one would expect Travis Perkins to try and boost earnings from this customer-set in line with its new strategy.

“It looks like it will try and spruce up Wickes before ‘reviewing’ the business in the medium term, which one can translate as meaning it may be put up for sale down the line.

“It is positive to see Travis Perkins make clear strategic decisions as the business has been treading water for some time. Earnings forecasts have been slowly downgraded over the past year, and return on capital employed – how well it is using its capital to generate profits – has been a lot weaker in recent years. Pre-tax profit has also been in a falling trend.

“Having a restructuring plan on paper is easy, executing the new strategy and achieving cost savings without disrupting the flow of the business is far from straightforward.”

These articles are for information purposes only and are not a personal recommendation or advice.