FERG - Right Tail Capital - Ferguson: An Investment That Can Compound At A Mid-Teens Rate
2023-10-19 06:15:00 ET
Summary
- Ferguson is a leading distributor of plumbing and HVAC supplies in the US, with a market cap of $33 billion.
- The company benefits from its position in the value chain, with a wide range of suppliers and customers, and focuses on providing excellent service and parts availability.
- Despite concerns about rising prices and the impact of interest rates on construction, Ferguson's stock price has appreciated by around 40% and the company is expected to continue gaining market share.
The following segment was excerpted from this fund letter.
Ferguson ( FERG )
Ferguson is a leading US-focused distributor ($33B mkt cap) of plumbing and HVAC supplies that is split between non-residential (48%) and residential (52%) as well as repair/remodel (60%) and new construction (40%).
Like other high-quality distributors, Ferguson benefits from a prime spot in its value chain. It has many suppliers (over 30,000), customers (~1 million), and small competitors. By providing great service and parts availability, Ferguson guides its customers to the parts they want in a timely fashion.
I think last year the market was worried that Ferguson had over-earned due to rising prices and excess demand during Covid. Furthermore, the company had removed its primary listing in the United Kingdom that caused some force selling among European index holders. Right Tail had the key insight that Ferguson should be able to hold onto most of its pricing and margins.
I wrote this in our Q2 2022 letter :
After a few years of strong fundamentals, investors are questioning Ferguson’s near-term fundamentals partially due to increases in interest rates and the impact that may have on construction. I do not know what will happen to business fundamentals though I recognize that this business has historically done a good job of holding onto price after prices have risen. The 60% of revenues that comes from repair/remodel should provide some protection against any potential cyclical headwinds in new housing starts and commercial construction.
With pricing likely not being the number one concern for contractors and commodity products only accounting for 15% of Ferugson’s business, I thought the company’s fundamentals would hang in better than others feared. While it’s a short period of time to assess performance, Ferguson’s stock price has appreciated ~40% since we discussed it in our Q2 2022 investor letter. I would guess that Ferguson’s earnings have held up better than investors feared at many points last year.
Whenever I find myself tempted to think too short-term, I envision where this company might be in the next five or ten years. This is a subjective exercise based on careful research though the future is uncertain. That said, I believe one can assess the odds of the changes in a company’s relevance in a given industry. Ferguson scores quite well on this litmus test.
I think they’ll continue to gain share in plumbing and HVAC distribution from smaller regional players. I continue to think this investment can compound at a mid-teens rate over the coming years hopefully driven by low to mid-teens growth in earnings per share mixed in with a bit of multiple expansion.
Getting added to the S&P 500 index would be a nice sweetener as well.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Right Tail Capital - Ferguson: An Investment That Can Compound At A Mid-Teens Rate