CS cuts Ferguson target on FX, reiterates 'outperform' on solid fundamentals

Credit Suisse cut its price target on plumbing and heating supplier Ferguson, formerly Wolseley, but kept its 'outperform' rating on the stock.

The bank chopped the price target to 6,280p from 6,500 given the year-to-date weakening of the USD/GBP rate, but reiterated its 'outperform' rating as fundamentals are still solid. It also lifted its group organic growth estimates for the next three years, pointing to a better demand outlook.

CS said the rating was based on three key factors. The first is that the Leading Indicator of Remodeling Activity and Dodge Momentum Index point to ongoing strength in both the residential and non-residential repair, maintenance and improvement markets over the balance of calendar 2018, supported by earnings reports of key US peers.

The second is that it estimates the positive delta in commodity prices supports circa one third of its projected EBITA growth for FY18E, significantly underpinning earnings per share estimates and providing an opportunity for reinvestment.

Thirdly, CS said that rising fixed rate mortgage rates in the US are not historically mutually incompatible with share price outperformance of RMI stocks and growth stocks like Ferguson can outperform when bond yields rise in late-cycle bull markets, aided by offsetting tax cuts and an improved employment outlook in the US.

The bank said it continues to believe that the group trades at an unjustifiably large discount to the US peer group, given the strength of Ferguson's market position and balance sheet.

At 1400 GMT, the shares were up 1% to 5,324p.