The Bottom Line 7-26
Ferguson (LSE: FERG) Initiation:
The Largest Company You’ve Never Heard Of
TRG this week initiated coverage of Ferguson (LSE: FERG), a U.S. consolidation story trading at a deep discount relative to its U.S. peers. Ferguson is the largest U.S. distributor of residential & non-residential plumbing, waterworks, fire/fabrication supplies in the U.S., and the third largest distributor of industrial and HVAC/R products. While headquartered in the U.K., the lionshare of the company’s revenues and essentially all of its operating earnings is U.S. focused (80% of revenues and 94% of operating profit coming from the U.S). Critical to assessing whether Ferguson is a compelling business model with upside to value is answering three critical questions: 1) Do you have scale? 2) Are revenue and earnings growth stable? 3) Are you capable of fending off Amazon? In TRG’s opinion, the answer to all three of these questions is “YES.” We think FERG feels a lot like Pool Corp (POOL) in the late 90s/early 2000s, except Ferguson’s total addressable market is over 2x the size of POOL’s. Investment positives include 1) dominant U.S. market share & opportunity to consolidate a highly fragmented U.S. market; 2) double-digit revenue growth fueled by stable organic growth + accretive acquisitions; 3) clean balance sheet, strong FCF; and 4) trading at a deep discount relative to U.S. peers. The Ferguson story got that much more interesting with the mid-June announced 6% stake by activist investor Nelson Peltz’s Trian Fund Management.