Wolseley enjoys strong Q1 in US but valuation now fair, Citi downgrades

Citigroup said it is "backing off for now" at Wolseley as it lowered its stance for the building and plumbing products group from 'buy' to 'neutral'.

"Despite expecting the group to deliver strong earnings growth with a strong balance sheet, we downgrade our rating to 'neutral' on valuation grounds," said analyst Aynsley Lanmin and Ami Galla.

They said that the stock has enjoyed a good absolute performance since 2010 and has seen a decent bounce over the last month, leaving it trading on 14.8 times estimated earnings for the 2015 calendar year.

This valuation, Lanmin and Galla said, "looks relatively fair near term".

Nevertheless, the analysts admitted that Wolseley's first-quarter update on Wednesday showed a "very strong US performance" as like-for-like sales growth accelerated and margins expanded, making up for a challenging environment in Europe.

"The US business continues to drive profit growth, boosted by a stronger US dollar and the balance sheet supports more buybacks or special dividends over the coming 12-18 months," Lanmin and Galla said.

After upgrading their profit forecasts, the target price for the shares has been lifted from 3,660p to 3,800p.

Wolseley's shares were down 0.2% at 3,525p by 11:08.