Ferguson Earnings: Strong Profit Margins Continue Despite Slowing End Markets

Ferguson’s FERG fiscal fourth-quarter results (ended July 31) came in ahead of our expectations due to greater revenue contribution from acquisitions and resilient gross profit margin. Total reported revenue fell approximately 2% year over year (versus our expectation for a 4% decline) and adjusted operating margin of 10.4% was 90 basis points above our projection.

U.S. revenue declined 1.5% year over year (organic revenue was 5.5% lower) as softer residential market sales more than offset resilient nonresidential demand and growth from acquisitions. Reported U.S. residential revenue was down 4% compared with 2% nonresidential revenue growth.

We continue to be impressed with Ferguson’s gross profit margins, which have exceeded 30% for the past two years. Fourth-quarter gross margin expanded 10 basis points year over year to 30.6%. Adjusted operating margin compressed 30 basis points to 10.4% due to less operating leverage, but this is still historically strong profitability for Ferguson.

Looking ahead, management expects roughly flat revenue growth in fiscal 2024 as organic market outperformance and acquisitions more than offset a mid-single-digit percentage decline in end market sales. Notably, price inflation, which had decelerated throughout fiscal 2023, is expected to be neutral in 2024. Management is targeting a 9.2%-9.8% adjusted operating margin next year, compared with fiscal 2023′s 9.8%. We project Ferguson can maintain about a 9.5% adjusted operating margin over the next four years, but we temper our midcycle margin to 8.5%.

We’ve raised our fair value estimate for New York Stock Exchange-listed shares approximately 4% to $147 per share, primarily due to the time value of money and our more optimistic near-term profit margin outlook. The change in the GBP/USD exchange rate since our last update (1.22 versus 1.31) caused us to raise our fair value estimate for London Stock Exchange-listed shares about 11% to GBX 12,000.