JPMorgan upgrades Wolseley to 'overweight'

JPMorgan Cazenove upgraded building materials distributor Wolseley to 'overweight' from 'neutral' and lifted the price target to 5,600p from 4,960p pointing to scope for US earnings upside and a structural case for multiple expansion.

JPM noted that versus its universe, the stock has underperformed by 5-10% year-to-date. "Without factoring in any upside from US tax or infrastructure policies, we can see scope for around 15% upside to earnings, aided by inflation, sustained end market growth and bolt-ons."

The bank said there is a strong argument that even without the upgrade potential, an increasing proportion of earnings from the US and reduced exposure to new build versus previous peak should drive sustained multiple expansion.

JPM said downgrades of recent years may have led it to take an overly cautious view on the earnings outlook. Wolseley saw downgrades through FY16 driven by deflation, and material declines in industrial demand. The bank's estimates for FY18 and FY19 assume a sequential slowing in volume growth and modest price inflation, despite key lead indicators remaining broadly positive and recent history suggesting that commodity price inflation through 2016 could drive meaningful price growth into FY18.

"Stronger volume and price would in our view most likely drive stronger year-on-year margin growth than the 10 basis points we forecast," it added.

At 0940 BST, the shares were up 0.6% to 5,065p.