Ferguson (NYSE: FERG)
QVI Research Report | Initial Coverage | August 2023
Summary
Ferguson is the largest distributor of plumbing and HVAC products in North America, and its stock price has a long history of outperforming the industrials sector and broader market.
Despite solid fundamentals and below-average downside risks, the market continually underbuys the mid-cap stock, thus keeping valuations reasonable.
In its initial coverage of Ferguson, QVI rates the company as a long-term buy-and-hold industrials staple serving the growing commercial and residential infrastructure markets.
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Ferguson Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Ferguson plc FERG 0.00%↑ is a dividend-paying mid-cap stock in the industrials sector’s trading companies and distributors industry. FERG was added to the QVI Expanded Portfolio at the market close on August 2, 2023, at $159.75 a share.
Ferguson plc distributes plumbing and heating products in the United States and Canada. It offers plumbing and heating solutions to customers in the residential, commercial, civil/infrastructure, and industrial end markets. The company also provides expertise, solutions, and products, including infrastructure, plumbing, appliances, fire, fabrication, and others, as well as heating, ventilation, and air conditioning products under the Ferguson brand name. In addition, it supplies pipes, valves, fittings, plumbing supplies, water and wastewater treatment products, and refrigeration products under the Wolseley brand. Further, the company provides after-sales support comprising warranty, credit, project-based billing, returns, maintenance, repair, and operations support. It sells its products through wholesale distributors, supply houses, retail enterprises, and online. The company operates a network of 1,720 branches and 11 distribution centers. Ferguson plc was founded in 1887 and is headquartered in Wokingham, the United Kingdom.
QVI’s value proposition elevator pitch for Ferguson:
Although based in the United Kingdom, Ferguson is the largest distributor of plumbing, heating, ventilation, and air conditioning products to the industrial and construction markets in North America, and its stock price has a long history of outperforming the sector and the broader market.
Performance vs. Sector and Market
The chart below illustrates FERG’s performance against the Industrial Select Sector SPDR® Fund ETF (NYSE: XLI) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) over the last ten years.
For example, FERG trounced its sector and the broader market in total return during the coverage timeframe, particularly in the most recent three years.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Ferguson’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Ferguson: Bullish.
FERG Total Return vs. XLI and SPY
Ferguson plc (FERG) Total Return: +324.80%
Industrial Sel Sec SPDR ETF (XLI) Total Return: +191.50%
SPDR S&P 500 ETF Trust (SPY) Total Return: +221.60%
Ten-Year Trailing (as of August 2, 2023)FERG Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
FERG’s earnings yield traded just below the QVI targeted floor at 5.59%, as demonstrated in the chart below. In addition, at 5.40%, FERG’s free cash flow yield traded under the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that FERG trades at a reasonable market value. QVI will further explore valuation multiples later in this report.
Dividend Yield
Ferguson offers a forward dividend yield of 2.59%, supported by a moderate 41.98% payout ratio, thus indicating a dividend rate with room for additional annual increases.
FERG yielded 10.79% from an annual payout of $4.16 on a split- and dividend-adjusted cost basis of $38.57 per share on August 2, 2013, or the trailing ten years to demonstrate FERG’s income-producing history for buy-and-hold investors. Thus, the yield-on-cost was +820 basis points or bps above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 4.07% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for FERG was 4.53% or +46 bps above the 10-Year and 7.26% or +349 bps above the Treasury yield when using the trailing ten-year yield-on-cost basis.
QVI’s forward shareholder yields rating for FERG: Bullish.
FERG Shareholder Yields
Ferguson plc (FERG) Price: $160.36
Ferguson plc (FERG) Earnings Yield: 5.59%
Ferguson plc (FERG) Free Cash Flow Yield: 5.40%
Ferguson plc (FERG) Dividend Yield: 2.59%
One-Year Trailing (as of August 2, 2023)Ferguson Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Ferguson had positive three-year annualized double-digit revenue growth of 25.33%, outperforming the 10.56% median growth of the industrials sector.
Farther down the income statement, Ferguson had a trailing three-year mid-single-digit net profit margin of 6.31%, in line with the sector’s median net margin of 6.28%
Returns on Equity and Invested Capital
Ferguson’s management produced a trailing three-year return on equity or ROE of 39.71%, far surpassing the targeted threshold and the sector’s median ROE of 13.70%
Stock buyback programs often elevate ROE. For example, Ferguson’s board of directors announced the continuation of a $2.5 billion repurchase program in March. The program’s primary purpose is to reduce the company’s capital. However, are they buying the stock at a discount for shareholders?
At 22.01%, Ferguson’s three-year return on invested capital, or ROIC, was above the QVI threshold and tripled the sector’s median ROIC of 7.01%, indicating that its senior executives are outstanding capital allocators.
In addition, Ferguson’s ROIC comfortably exceeds its otherwise elevated weighted average cost of capital, or WACC, of 9.05%. (Source of WACC: GuruFocus).
Double-digit revenue growth, an industry-competitive profit margin, and sector-beating returns on equity and invested capital suggest that Ferguson’s management continues its long history of 2nd-level performance serving North America from its perch in the UK.
QVI’s fundamentals rating for Ferguson: Bullish.
FERG Returns on Management
Ferguson plc (FERG) Revenue Growth: 25.33%
Ferguson plc (FERG) Profit Margin: 6.31%
Ferguson plc (FERG) Return on Equity: 39.71%
Ferguson plc (FERG) Return on Invested Capital: 22.01%
Three-Year Trailing (as of August 2, 2023)FERG Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Ferguson plc (FERG), including potential catalysts. So, let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have no beneficial position through direct ownership of any stock mentioned in this report thus far. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is the contributing editor of Quality Value Investing, and author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. His work has been featured on Seeking Alpha, TalkMarkets, ValueWalk, MSN Money, Yahoo Finance, QAV (Australia’s #1 Value Investing Podcast), Money Life with Chuck Jaffe, The Acquirer’s Multiple, Amazon.com, Barnes & Noble, Apple Books, the BookLife Prize, and Publisher’s Weekly. David received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
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