Plumbing the depths with Wolseley

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I've caught a big fish in my net, and I'm not altogether happy about it. Wolseley (WOS) is the world’s largest distributor of plumbing, heating, and building supplies, Unless you’ve come across it as an investor you might never have heard of it. The company owns an army of businesses that go by their own names, perhaps most famously Plumb Centre in the UK, but also Pipe Centre, Drain Centre, Build Centre, an insulation supplier, an equipment rental company and a bathroom retailer . It’s an even bigger fish in the United States, and operates multiple businesses in France, Scandinavia and Central and Eastern Europe. From bathrooms to brassware and tiles to timber, Wolseley supplies the building trade. It’s in the FTSE 100, words you won’t often see typed on this blog because big companies aren’t often sucked into bargain territory. On the rare occasion they are, I usually find some excuse to release them back into the wild. Invariably, something’s gone drastically wrong. In Wolseley’s case its the noxious mix of recession and debt. Mortgage defaults by homeowners in the US triggered the financial crisis that caused the recession we’re now experiencing. Many of those homeowners will have been living in houses plumbed, furnished and built with products from Wolseley companies. The dire contraction in house sales in the US and the UK means Wolseley is selling fewer pipes, and making much less money from them, but its problems go beyond its customers. Overconfident homeowners weren’t the only ones that lived beyond their means. Wolseley also borrowed to buy more businesses. Its timeline tells of the company’s evolution from a manufacturer of Australian sheep shearing equipment in the 1880’s to a distributor of plumbing and heating equipment via car manufacture and other engineering exploits. But there’s only room on it for its principal acquisitions. In recent years, many of those businesses have been gobbling builders merchants, truss manufacturers and hardware suppliers. It’s 2008 annual report (last year’s) documents 15 acquisitions, a disappointment in comparison to previous years, adding less than 5% to revenues compared to a its five-year average of about 12%. Just like the housing boom, Wolseley’s expansion wasn’t sustainable and although the company made no acquisitions in 2009, it culminated last April in the disposal of 51% of Stock Building Supply, which was making heavy losses, and a humiliating and complicated fund raising. Through a placing, and a subsequent rights issue, Wolseley raised £1bn issuing new shares at the expense of existing shareholders. Those actions may have saved the company. Ignoring over £1bn of losses that might be deemed exceptional it just about made a profit in 2009 and scores a middling five out of nine for financial strength. That’s really borderline, though. Anything less than an F_Score of five is a definite no. Weak companies are more likely to go bust, and less likely to earn investors a good return. I don’t have much faith in a score of five when I have to ignore huge write-offs, restructuring costs, and provisions to achieve it. Wolseley’s valuation too, is suspect. The shares cost less than seven times the average of its last ten years of profits, but that figure is only relevant if Wolseley will achieve a similar level of profit in future. I wouldn’t dream of trying to predict the future, but I suspect that Wolseley’s last ten years of profit are somewhat illusory anyway, reliant, as they were on a debt burden the company couldn’t sustain when the housing market collapsed. Ian Meekins, Wolseley’s new chief executive, admits the recession has highlighted the cyclicality of the building trade and... ...the path to recovery is far from certain. In a number of ways the recent economic turmoil has redrawn the map in terms of future trajectories for our markets… One of those pathways airbrushed from his map, I suspect, is a debt fuelled acquisition boom any time soon. Despite these reservations I’m torn by Wolseley. So torn I’m actually making up my mind as I write these paragraphs. It’s in the kind of prosaic business that ought to recover, it’s shedding businesses not acquiring them now, and focusing on costs, cash flow and the customer. But I’m in the business of adding financially strong companies at cheap prices to the Thrifty 30 model portfolio and wield two numbers to protect me from the weak (The F_Score) and expensive (The long-term price earnings ratio). I’m not confident enough in either of them to add Wolseley today. - And now for something a little different. Instead I’m adding electrical contractor T Clarke (CTO) at Friday’s close of 139.5p. On a ten-year price earnings ratio of 10.5, its flirting with bargain status. Despite uncertainty in the construction sector, it, I think is a survivor. I profiled it in June, and its half-year results in August were reassuring. - Here’s the current Thrifty 30: First transaction: 9 September 2009
Valuation date: 23 October 2009
Cost includes £10 broker fee and £5 stamp duty
Cash earns no interest
Dividends and sale proceeds are credited to the cash balance
- Bohemian bankruptcy Andrew Smithers says the US stockmarket is 40% overvalued. Peter Temple, says it feels like we’re in a bull market [iBall video]. According to new research by the Brandes Institute, value still beats growth by a large margin Value investors Donald and Brian Yacktman reveal their investing process. Graeme Pietersz, of Moneyterms, comes out in support of Bachelier after I blamed him for the state of financial analysis. This is why I’ll never be a top-down analyst. It’s all speculation innit? A review of the Thrifty 30. Thank you anonymous blogger. And finally, can you spot our editor in chief, Freddie McDowell, in this production of Bohemian Bankruptcy, by Drag Queen?


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