FERG - Ferguson: Has The Momentum

2023-12-24 07:34:05 ET

Summary

• Despite stagnant growth, FERG's share price has surged recently, indicating positive expectations for future growth.
• The company's Q1 FY24 results showed a decline in net sales and income, but signs of recovery in the construction market are promising.
• FERG's strong balance sheet, improving market conditions, and low valuation make it a favorable investment option.

The last time I wrote on ( FERG ) was in October, and I was expecting stagnant growth, which was the case. But despite the stagnant growth, its share price has surged in recent times. The current situation of FERG looks better, and despite average results, I think it can be rewarding due to improving market conditions and a bullish technical chart. Hence, I changed my rating to buy from a hold.

Financial Analysis

It recently posted its Q1 FY24 results . The net sales for Q1 FY24 were $7.7 billion, a decline of 2.8% compared to Q1 FY23. The major reason behind the decline was softness in the residential market. The U.S. residential market sales declined by 7% in Q1 FY24 compared to Q1 FY23. The sales in Canada also declined in the residential market segment. The gross margin for Q1 FY24 was 30.2%, which was 30.5% in Q1 FY23. The decline in margins was due to lower pricing, which was caused by commodity deflation.

The net income declined 12.7% in Q1 FY24 compared to Q1 FY23. The decline in sales was expected, as the slowdown in the construction market was still a concern. However, there are signs of recovery in the construction market, which I think will be beneficial for the company. The mortgage rates have stopped increasing, and the inflation seems to be in control, which is a very good sign for FERG. The last time I wrote an article on FERG, I expected stagnant revenue growth in FY24, which was the case in the first quarter. However, looking at the improving market conditions, I see a ray of hope for them in terms of sales growth. I now expect them to perform better in terms of sales growth. In addition, its balance sheet has been improving. Its CFO in October 2023 was $557 million, which was $498 million in July 2023, and the long-term debt declined 1.3% in Q1 FY24 compared to Q4 FY23. Its cash has increased 23.6% in Q1 FY24 compared to Q4 FY23. So, the strong balance sheet and improving market conditions are positive for FERG.

Technical Analysis

It is trading at $192.1. In my last analysis, I said that $180 is an important resistance zone, and if the stock fails to break it, we might see a correction in the stock price. But it looks like the buying strength in the stock is quite strong. The stock broke the $180 level with ease, and the breakout candle was a big green candle without any wick. It shows that the buyers are active in this stock. The next resistance zone is at $200, and I see it reaching the $200 level. Looking at the buying strength, I believe it is just a matter of time before it reaches $200. In the short term, I see it reaching $200, and if it breaks it, then we might see the stock reaching $270, which is its all-time high. Hence, I am bullish on FERG with a short-term target of $200.

Should One Invest In FERG?

Despite the stagnant growth in Q1 FY24, its share price has increased recently and has given a breakout. I believe the recent uptick in the stock price is due to positive expectations for the remainder of FY24 due to the improving market conditions. So, I think the market is betting on the future rather than the current situation, and I believe we might see good growth in the coming quarters. Now, looking at the valuations. It is trading at a P/E [FWD] ratio of 20.76x, which is lower than its sector median of 22.37x. It is trading at an EV / Sales [FWD] ratio of 1.43x, which is also lower than the sector ratio of 1.77x. So, despite the recent surge in the stock price, I believe it still has more upside to offer. Hence, considering the bullish technical chart, improving market conditions, and low valuation, I am changing my rating to a buy from a hold.

Risk

Their target markets, which are the RMI, new building, residential, and non-residential industries, are somewhat reliant on specific macroeconomic patterns in these areas. The Company's net sales from continuing operations in the residential and non-residential markets in the 2023 fiscal year accounted for roughly 52% and 48% of net sales, respectively. Their sales are further separated into the RMI and new construction markets within the residential and non-residential markets; these two segments account for roughly 60% and 40% of net sales from continuing operations, respectively. Unexpected changes in their end market tastes and purchasing behaviors, as well as in their client's business models and tactics, may result from a slowdown in the residential and/or non-residential markets brought on by inflation, higher interest or mortgage rates, or other market concerns. Such changes could have a negative impact on their Company, financial situation, and operational outcomes by changing the types and costs of goods that end users and their consumers demand.

Bottom Line

Although the quarterly result wasn’t solid, I believe FERG can be rewarding, and there are a few reasons behind it. First, the improving market conditions can boost its sales growth, and we might see better-than-expected results in the coming quarters. In addition, the stock price has given a solid breakout and has momentum. So, I am changing my rating to buy from a hold.

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