Berenberg cuts Ferguson to 'hold' amid US slowdown

Analysts at Berenberg downgraded their rating for Ferguson shares from 'buy' to 'hold' on Friday amid concern over a slowdown in US construction activity outside of the residential sector and in the Canadian housing market, following years of "exceptional" growth, adding that it would take time for the effects of Trian's stake building in its capital to make themselves felt.

In a research note sent to clients, analysts explained that while new build housing data had softened since autumn 2018, the company's other end markets had held up.

But more recently, there had been an across the board slowdown, with with repair, maintenance and improvement indicators such as the National Association of Home Builders' remodelling index and non-residential indicators such as the Architecture Billing Index pointing to a slowdown in growth.

This slowdown has started to impact the numbers, with US like-for-like growth at the plumbing and heating products producer slowing to 3.3% in the third quarter from 9.6% over the first half.

"With management having already reduced guidance for H2 to 3-5% like-for-like growth, we now also apply this to our outer year forecasts. We still believe Ferguson will be able to outperform peers given its focus on service and position in the market. However, with reduced certainty in end-markets, and the softening in the Canadian housing market, we think there is limited upward pressure on earnings," said the note.

Berenberg lowered its earnings per share estimates for 2019-12 by between 4.0-7.0%.

The analysts also cut their target price for stock from 6,500p to 6,000p, noting Guernsey-based activist shareholder Trian Investors decision to take an approximately 6% stake in Ferguson with the aim of closing the discount with US peers

"We think the debate about a US listing and a UK disposal could thus resurface. Although both would be a positive catalyst in our view, we believe the former will take time and will be difficult with the current shareholder base, given the need for 75% shareholder approval," said the analysts.

While the stock has traded at a premium to the UK merchants and distributors for several years, thanks in part to a robust US construction market, Ferguson's operations across the Atlantic now deserved to trade at a discount to the five-year US peer average.

Ferguson's shares were down 0.92% at 5,570.00p at 1257 BST.