Hobson: Ferguson Plumbs the Depths

THE WEEK: Morningstar columnist Rodney thinks the very sharp fall in heating and plumbing engineer Ferguson's share price was overdone

Rodney Hobson 29 March, 2019 | 9:13AM

Burst water pipe

I’m not the type of investor who gets up at 7am, digests the morning’s London Stock Exchange announcements and dives in on the stroke of 8am when trading starts. In any case, trading can be quite erratic, and spreads quite wide, in those first few minutes and the initial reaction to news can be overtaken within minutes as wiser heads spot something that impulsive souls missed.

Even if investors do not go so far as to change their minds about a stock, they very often feel that a sharp movement in either direction has been overdone, opening up a buying or selling opportunity.

That is what happened this week at heating and plumbing engineer Ferguson (FERG), where shares slumped 11% at the market opening in reaction to a first half update. The deficit was reduced to 7% by close of play and there was a further modest uplift the following morning.

Ferguson used to be known as Wolseley. The name change came when Wolseley bought its US counterpart and took on the name of the American company because most of its sales and profits now come from across the Atlantic.

Although the impact of the slowdown in the UK has thus had a minimal impact on Ferguson, the company is now feeling a disproportionate impact from the admittedly less serious easing of economic growth in the US. GDP expanding 2.9% is great in developed world terms but it’s less than the recent past and less than Trump boasted his trade barriers and tax cuts would create.

Good luck to those who seized the chance to snap up shares at the bottom. Ferguson should still have a decent year and the shares have fallen 30% in the past six months, so they were starting to look cheap.

However, I just have a nagging feeling that caution is called for. Chief executive John Martin is forecasting organic growth of 3-5%, below his own target of 6%. First half trading profits grew a highly respectable 8% but Martin warned that the full year would be lower than analysts’ forecasts. With the UK end seeing revenue and profits falling sharply, the shares look too risky for me. One warning tends to be followed by another.

Interserve Setback for Pennon

It hard enough running your own business without having to worry about a major partner going down the swanny but it’s something that executives have to cope with. Water and waste group Pennon (PNN) is caught up with the debacle at Interserve, which has gone into administration owing cash on the Glasgow Recycling Renewable Energy Centre.

Interserve has coughed up some of its obligations but Pennon has set aside £16 million and it realises that may not cover all the potential default. It’s an issue that will hang over Pennon for some time.

That’s a great pity, as the rest of Pennon’s update, ahead of the financial year end on Sunday, was reassuring. Its South West Water subsidiary coped with extra demand for water during last summer’s prolonged dry spell and recycling prices are holding up.

The shares were below 600p a year ago but the recovery has stalled around 780p, which was a support point on the way down. Support now stands at 690p but I think the break is more likely to be upwards – provided the Interserve setback can be contained.

ISA Deadline Approaches

If you haven’t used up your ISA entitlement for 2018-19 and have spare cash there is no need to rush into a hasty investment. Simply transfer the cash into your stocks and shares ISA before 5 April and invest it at leisure. Then resolve not to leave it to the last minute next year.

 

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Ferguson PLC5,396.00 GBP0.00
Pennon Group PLC701.20 GBP0.00

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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