LONDON -- Plumbing and heating product specialist Wolseley (LSE: WOS) (NASDAQOTH: WOSCY) has continued to grow despite extreme difficulties in its key markets of Western Europe.
Steady progress into North America, coupled with sterling work to improve operating margins through dynamic pricing and cost reductions, has helped heal itself following the 2008 recession.
The shares have risen almost 23% over the past six months and are trading just below recent all-time highs above 3,280 pence. However, I believe the price currently trades at too lofty a premium given persistent headwinds on the continent and recent patchy data from the U.S., which could drive the stock lower in the near term.
Revenues remain bubbly... for now
The firm's December interims showed revenues rise 0.9% to £3.3 billion in the July October period, with like-for-like sales up 2.1%. This pushed trading profit 7.6% higher to £198 million.
Wolseley has made excellent progress in the U.S. in recent years -- the region now accounts for more than half of group turnover -- and like-for-like sales there rose 7.1% in the first quarter.
However, the company has witnessed a continued deterioration in Western Europe, with like-for-like sales in France and the Nordic states slumping 8.2% and 4.8% respectively on an annual basis. Meanwhile, like-for-like sales in the U.K. fell 0.3%, and the firm is reviewing its strategy in Europe in a bid to stem losses.
Looking ahead, the implications of government spending cuts across the Atlantic could heavily dent Wolseley's key markets later this year, while recent data has also raised fresh concerns over the construction industry.
Latest U.S. construction spending numbers showed annual expenditure fall 2.1% in January to $833 billion -- the largest fall since mid-2011 and bucking nine successive rises -- as spending from both the public and private sectors slumped.
Shares ascent raises valuation question
Analysts expect earnings per share to rise 9% in the financial year ending July 2013 to 183 pence, before accelerating 19% in 2014 to 218 pence.
Wolseley also offers a progressive dividend policy, although medium-term yield estimates are expected to remain below the FTSE 100 average of 3.5% -- yields of 2.1% and 2.5% are anticipated in 2013 and 2014 respectively. The firm hiked its dividend to 60 pence per share last year from 45 pence per share in 2011, and payouts of 69.3 pence per share in 2013 and 82.2 pence per share in 2014 are predicted by City brokers.
The company currently trades on P/E ratios of 17.9 and 15 for 2013 and 2014 respectively following steady share-price increases. But I believe that, considering the company still has work to do to combat deteriorating conditions in Europe, and business in the U.S. could run into trouble in the near future, the rapid ascent in the share price does not address these issues.
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