Wolseley
Wolseley owns and operates around 5000 branches and a network of distribution centres employing around 74,000 people. The company's businesses service primarily the housing and construction industry, supplying a wide range of electrical, plumbing, ventilation, heating and building material products.
Wolseley - plumbing the lows
Indices continue there decline towards the October lows…
As can be seen from the above chart of the FTSE 100 the index has continued to decline from resistance at 4600, with the FTSE falling around 13% in the past two weeks.
Mounting evidence of deepening global economic gloom has continued to weigh on investor sentiment, with evidence of rising unemployment and confirmation that Japan has become the latest economy to slip into recession, thus heightening fears of a prolonged downturn.
Even a meeting of the world’s group of 20 richest nations (G20), aimed to restore global growth, failed to lift sentiment and there is no evidence to give the bulls any comfort.
Technical analysis of the above chart shows that the FTSE 100 failed to conclusively break key resistance at 4600 and the 50 day moving average. The support from the relative strength index (RSI) has also broken and the index looks set to trend lower toward the October lows.
It is also worth noting that the US markets are trading comparatively lower than the UK, with the S&P 500 even posting a fresh intraday low, not seen since 2003. Divergence of this nature tends not to last, although due to the aggressive currency moves at present, where we have seen GBP/USD move from over $2 to under $1.5 in a matter of months, this is distorting the correlation.
In summary, the US markets appear to be offering good long term investment levels and the FTSE is currently trading around 9% above the October lows, therefore there is the possibility of a short term pairs trade – buying the S&P 500 and selling the FTSE 100.
With this in mind, I am inclined to focus on a UK stock with a large exposure in the US. Wolseley is a builder’s merchant and the world’s largest distributer of heating and plumbing products, with more than half its sales coming from the US.
Wolseley released a grim Interim management statement to the market on the 18th November, although it was no worse than analysts had expected.
In a sign of the increasingly acute contraction of the worldwide property market, first quarter pretax profits fell 45% and they expect further deterioration of its markets in the short term.
As the slowdown continues to bite and profits fall, Wolseley’s key priorities remain driving cost reduction and enhancing cash flow to ensure the group remains compliant with its banking covenants.
The group announced that it would close around 200 shops, slash around 2000 staff in the UK and 3400 in the US. They have also stopped any dividend payments for the foreseeable future.
These reductions mean the company has reduced overall headcount by about 15,000 staff, which represents 18% of total headcount since August 2007 and this will generate annual savings in excess of £100 million.
The outlook is also bleak, with finance director Stephen Webster stating “We started to see a decline back in May with the collapse of the mortgage market. That rate of deterioration has accelerated between September and today. It has now hit consumer confidence and peoples buying patterns.”
As a result, investors are growing increasingly concerned that the company will breach its banking covenants. However, Webster insisted Wolseley was trading well within its debt limits and they remain confident that this can be sustained.
The recent weakness in the share price puts them on 7x forecast earnings and although debt is high, the group generates good cash flow and the debt looks manageable, with current EBITDA being capable of covering interest payments five times over.
Furthermore, even though net debt has risen 8% since the end of July to £2.69 billion, the value of GBP/USD has fallen around 25% in the same period. Therefore, the benefits of recent currency movements mean that debt will be lower at the half year level.
The shares of Wolseley have fallen over 80% from the highs of 1486p experienced in March 2006, with the recent weakness causing the shares to return to historical support at 250p.
This support level is the lowest the shares have ever traded and has provided support in 1998, 2000 and on several occasions earlier this year.
Furthermore, the oscillators are indicating some bullish signals, with the faster stochastic starting to turn back up, which indicates that the shares could be oversold from a technical view point. Also, the RSI is showing some divergence, as it is higher than when the share price was trading at a comparable level back in July this year, which shows there is more buying momentum at present.
If we combine our earlier analysis of the FTSE and S&P 500, with the fundamentals and key technical levels discussed about Wolseley, I believe the shares offer an attractive risk/reward ratio at these depressed levels.
At the time of writing the share price is 261.75p and I am looking to build a long position a little closer to support at 255.5p. Near term targets are seen at 274.5p, 298p and 320p, with a stop loss marginally below historical support at 242.5p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Wolseley. The material in this report has come from Fidessa, Share Scope and Wolseley’s corporate website.
Register here to be notified of future Wolseley articles.