Plumbing and heating firm
has been undervalued due to poor performance at its British business, but a new activist shareholder and a plan to separate operations could boost the stock.
The United Kingdom–listed firm (ticker: FERG.UK) generates 90% of its sales in the U.S. In June, activist Nelson Peltz’s Trian Partners built a 6% stake, and Ferguson announced earlier this month that it will split its businesses and focus on its more profitable U.S. firm.
The U.K. business will be called Wolseley, while the U.S. firm will keep the Ferguson name. Both will be listed on the London exchange, but a review is under way on whether to switch the listing to the U.S. The company also trades in the U.S. under its American depositary receipt (FERGY.US).
“We are at the beginning of what will be a comprehensive assessment of our listing structure,” CEO John Martin told Barron’s in a statement. “All options remain open, and no decisions have been made.” Kevin Murphy, CEO of Ferguson’s U.S. operations, will replace Martin in November.
The combined Ferguson trades at 14.7 times future earnings, in line with its peers. Poor performance dragged the stock down 2% over the past year, but it rose 89% over the past five years and currently trades at about 6,050 pence. Ferguson posted operating profit of $1.4 billion on sales of $20 billion for the year to July 2018, its latest full-year figures.
Keith Hughes, an analyst at Chicago-based SunTrust Robinson Humphrey, says a U.S. relisting would generate more analyst coverage. “We think Ferguson is a name primed for a revaluation, as its financial merits become more recognized by investors,” he wrote in a July note on Ferguson’s ADR. Hughes has a target ADR price of $10 a share—a more-than 30% premium to its recent $7.53 close. FactSet calculates this as an 82.90 pounds sterling target price for the FTSE 100 business. In a Sept. 12 note, Jefferies rated it a Buy with a £72.81 target price—about a 20% premium to its recent close of £60.05.
Ferguson is one of the biggest distributors of plumbing and heating products in the U.S., with 35,000 workers and more than one million customers in 2,280 locations across North America and the U.K. It has a market value of £14 billion ($17.5 billion).
The firm dates to 1887, when Frederick York Wolseley, an Irish immigrant living in Australia, founded the Wolseley Sheep Shearing Machine Co. in Sydney and relocated to England two years later. By 1896, the company started to design cars, and decades later manufactured munitions and boilers.
It bought Ferguson Enterprises in the U.S. in 1982 and listed on the London Stock Exchange. The company renamed itself Ferguson in 2017 and is headquartered in Newport News, Va.
The U.K. business has struggled due to a slowdown in the housing market on the back of overcapacity and Brexit uncertainty. Separating the two businesses makes sense and could trigger a revaluation. Hughes says the U.S. business would be valued at 10 times enterprise value/2020 estimated earnings before interest, tax, depreciation, and amortization.
While Ferguson’s U.S. business has seen a recent slowdown in sales growth, it’s still stronger than the U.K. Low interest rates may help boost the U.S. housing market and help sales. Peltz could push Ferguson to use more financial leverage to make acquisitions, which would increase the company’s value.