Wolseley gets more than four fifths of its profits from its Ferguson operation in the United States, up from three fifths seven years ago, and with the British operation being scaled back and the Nordic business under review, that proportion can only keep growing. It is a large American tail wagging a smaller, UK-quoted dog, then, even if a third or more of the shares are held by US investors.
This is not a bad place to be. All parts of the business slowed in the fourth quarter, but the US delivered 3.1 per cent revenue growth even as the UK and the Nordics fell by more than 2 per cent. Since the July end of the financial year, the US has accelerated, with a 4.5 per cent sales growth outstripping a 1.5 per cent rise across the group.
North America is the priority for fresh investment. Wolseley made 13 smaller acquisitions there and since the end of the financial year has approved further deals worth about £300 million. This is why the company, which in the past four years has returned more than £1 billion to investors, has put a block on further returns.
It is an eminently sensible move to invest for growth where it can be had, but some had expected another payment. This and the fact that the figures slightly undershot some expectations was behind a 56p fall in the shares to £42.44. Those shares have enjoyed a sharp surge since the referendum to reflect the proportion of revenues in dollars, so some profit-taking was plainly in order.
That US growth is impressive, although like other companies serving the industrial market Wolseley is suffering from weaker demand because of the low oil and gas price and lack of investment there, even if industrial accounts for only about 12 per cent of Ferguson’s turnover.
The problems in Britain and Scandinavia seem to be more protracted. The UK suffers from oversupply in Wolseley’s core heating market, while consumer demand is low in Finland and Denmark. The company is probably stuck in the Nordics for the moment, while the UK will take time to return to profit growth.
The shares sell on 14 times’ earnings. With that sterling benefit apparently factored in, they look high enough for now.
My advice Avoid
Why America is the engine for growth and acquisitions will boost it further, but most of the upside is reflected in the share price
Circassia Pharmaceuticals
Circassia is an object lesson in the dangers of investing in start-up biotech companies. It came to the market in 2014 with the promise of developing a whole new range of treatments for allergies, such as to cats and dust mites, at 310p a share. This is the Holy Grail for a pharma company because such conditions are effectively untreatable but not life-threatening, so sales are guaranteed for the sufferer’s lifetime.
It became obvious in the summer that something was badly wrong in the clinical trials and the market has written off that earlier allergy treatment as worthless. This leaves the company relying on the asthma and pulmonary products it has acquired since the flotation, which are more mature and pedestrian, while sitting on £138 million of cash.
It is impossible to value that business on any rational basis while the shares, off 2¾p at 94½p, are little-changed since the summer. Further allergy trials next year may validate those allergy treatments or they may demonstrate that they are indeed worthless. Circassia remains a huge punt on the unknown, but, given the potential upside, I would recommend a speculative buy.
My advice Buy
Why This is a huge gamble, but the upside is also huge
Card Factory
Sellers of greetings cards should be as immune as any on the high street to the effects of the weather because, unlike the clothing and fashion chains, birthdays are spread across the year and Christmas is an unmoveable feast. Retailers such as Card Factory can’t do much about the general decline in footfall reported over the summer, though.
The chain, which floated on the stock market two years ago, is raising spending by each customer walking into one of its stores by increasing its novelty range (with stuffed pug dogs being especially in demand, apparently), but like-for-like sales in the first half to the end of July were up by only 0.2 per cent, against 2.8 per cent last time, and sales at its personalised gifts website were flat.
Competitive markets ought to benefit Card Factory, which claims to undercut the competition on price. Sterling’s weakness will become a factor next year as hedging against this drops out, since those novelty goods are made in the Far East and are sourced in dollars. The company has held margins at 20 per cent, but it can expect some dilution in due course.
As I have suggested before, Card Factory is a difficult one to value. The shares sell on 16 times’ earnings, which is high for a niche retailer, but the company has returned a 15p special dividend for the second year and such payments are set to continue.
This puts the shares, up 8½p at 310½p, on a yield of more than 8 per cent, a good enough reason to hold, even if further share price growth looks limited.
My advice Hold
Why The high dividend yield looks set to continue
And finally . . .
Another favourable trading update from the quoted water companies. Unitied Utilities, which supplies the northwest, says that operating profits for the first half, when it reports in November, will be a bit ahead of last year. Such companies seldom produce much to startle the market. The picture that is emerging, after an update from Pennon last week, is that the three quoted companies may or may not exceed the rate of returns allowed by the regulator this year, but that those dividend yields are safe.
Follow me on Twitter for updates @MartinWaller10
