Deutsche Bank has transferred coverage of Wolseley and undertaken a major review of the company. In its view most of the group’s key markets have peaked and are likely to decline in 2005. “As a result we expect growth to stall next year. Our bleak outlook is not reflected in the stock’s premium rating. Our economic profit model implies a fair value of 800p (down from 880p) - more realistic at this stage in the cycle, in our view.”
Most of the group’s markets are likely to come under severe pressure next year. Wolseley’s biggest market is US residential (33 per cent of sales). We expect US housing starts to fall by 10 per cent in 2005. This is likely to be compounded by lower lumber, panel and commodity prices. US dollar weakness could add to the misery. The stock is the most exposed to the dollar in the sector. Outside of the US, the group’s biggest market is UK and Irish residential/RMI (22 per cent of sales). Here the outlook is also grim. Our economists expect UK house prices to fall by 10-15 per cent in 2005.
The outlook for US commercial and European construction markets is more encouraging, but any upturn in these areas is likely to be modest. As a result, overall we expect Wolseley’s EPS growth rates to collapse to 0.5 per cent in 2005 and 1.5 per cent in 2006. Bolt-on acquisitions and new store openings offer an upside to our numbers. Even taking market share gains into account, however, we still believe that EPS growth will slow to 6.2 per cent in 2005 and just 1.7 per cent in 2006 – concludes the report.
