Wolseley’s dollar earnings make it an attractive Brexit play

I dubbed Wolseley shares an appealing post-Brexit play last June when the share price was 3,781p. I see no reason to alter that fundamental judgement even now that they are 4,244p. The latest annual results suggest that life remains tough at the operational level, with margins scarcely improving. However, outside the US the company has the UK and Scandinavia on the drawing board for reform and change to make these businesses more efficient. In my view, a rise in interest rates in the US should be good news for Wolseley because it will betoken more economic growth with more inflation to go along with it.

There are several things that in principle make plumbing and heating equipment supplier Wolseley (LON:WOS) attractive. First is the fact that most of its business is outside the UK, and thus largely free of the incessant wrangling about what Brexit means, when it will happen and where it will take us. Moreover, with over 81 per cent of the Group’s business in the US it gives UK investors the knowledge that this is at least one UK cyclical investment that will exist mainly above and beyond the fate of the UK economy over the next few years, as it slips anchor to search for new markets in the seas under the flag of the World Trade Organization.

Wolseley has prospects for growing the sterling value of its top line sales revenue stream for two reasons. First, it will benefit from any further weakness of the pound sterling, after its big devaluation this summer against the dollar. Remember that the impact of that devaluation will benefit the current first-half sterling revenue line out to next June/July when it occurred. Dollar sales in the US over the next nine months will be translated as more pounds in the year on year comparisons if – as most assume – sterling remains weak. It is a helpful inbuilt advantage for investors to have.

Second, top line sales revenue will benefit from the takeover activities of the management as it consolidates local markets in the US by making ‘bolt on’ acquisitions. Revenue should continue to grow through such acquisitions this year, as made clear in the report for last year, just published. In a period of low inflation, that is a considerable advantage. In the last half of last year, Wolseley was reported to have spent £139 million in acquiring £197 million of ‘bolt on’ sales revenue. That looks as though it added 1% to the group sales revenue of 2015.

This year, we are told, the company plans to spend a further £300 million, which, if in line with last year’s calculations, suggests a further additional £425 million of sales, adding another 3 per cent or so to last year’s sales revenue stream. In that context, I note that the reported group sales figure for last year was 8.5 per cent. That, assuming a constant exchange value for sterling over the year, translates into a constant, underlying increase of 4.5 per cent. Furthermore, like for like sales were also reported as up 2.4 per cent last year. The top line looks particularly attractive from an investment view point.

The current market consensus estimate is for sales to increase 6.25 per cent this year. Given the devaluation benefit against the dollar – and with no particular reason to suppose that will improve this year (and possibly worsen if uncertainty about UK trading persists) – that increase strikes me as looking conservative in the circumstances. If for some reason you are bullish about sterling then logically this may not be the investment for you.

I add that the market estimates current year earnings per share will increase by 16 per cent after last year’s rise of an underlying 8 per cent. That puts the shares at 4,244p on a prospective price to earnings ratio of 15 times, making the share fair value if earnings do increase by 16 per cent this year. The forecast dividend cover is 2.5 times and the corresponding earnings yield is 6.7 per cent. A historic dividend yield growing at 13 per cent, as this one is estimated to do, is also attractive.