US cloud hangs over Wolseley

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The Independent Online

Wolseley, the building materials business, is an Old Economy stalwart that might have expected to find new popularity with investors as the tech fallout continues.

Wolseley, the building materials business, is an Old Economy stalwart that might have expected to find new popularity with investors as the tech fallout continues.

But as one cloud lifts another emerges, this time in the shape of the company's large exposure to the faltering US economy. The United States accounts for 65 per cent of Wolseley's sales. And the interests it has across the Atlantic, such as plumbing parts and a big lumber business which supplies the housebuilding industry, will be exposed to the full force of any significant slowdown in consumer spending.

This said, Wolseley's half-year figures yesterday were actually quite good. Stripping out a £75m provision to cover the sale of the UK boiler making business in February, operating profits rose to £172m in the six months to January, compared with £149m the previous year.

But the current trading statement describes the short term US outlook as "challenging", with a softening already emerging in the industrial and commercial sectors. Wolseley says demand for lumber has held up well with underlying sales up 2 per cent on the year and that spending on US housing is still increasing. The concern, though, is how deep the economic dip might be. A further problem is the price of lumber, which has fallen to an eight-year low due to excess supply. All this is frustrating for Wolseley, which has emerged as the US market leader in both plumbing supplies and building materials though its share of these markets is just 5 per cent and 2 per cent respectively.

For investors, a further frustration has been the near year-long search for a chief executive following the departure of John Young last June. This management gap is hardly ideal at a time of economic instability though Wolseley says it has a shortlist of candidates and hopes to make an announcement soon.

On Merrill Lynch's full-year profit forecast of £368m the shares - down 2p yesterday to 430p -- trade on a forward multiple of nine. This compares with forecast earnings growth of less than 5 per cent. Wolseley is a good business but the stock has already rallied from 260p in September and the threat from the US economy is too worrying to ignore. Sell.

Taylor Woodrow

Taylor Woodrow, the house builder which is about to swallow its rival Bryant later this week, reported results that will not give investors indigestion.

Even without Bryant, which will make the enlarged group the UK's fourth biggest house builder and a leading international player, Taylor Woodrow achieved a record 64 per cent increase in pre-tax profit to £201.5m in the year ending 31 December.

While the results yesterday were boosted by the disposal of the Greenham industrial services business, underlying operating profit grew by 23 per cent to £163.5m. The company's shares fell 3.5p to 201p as profit-taking set in on the back of the stock's 50 per cent rise since July.

If this seemed good, the addition of Midlands-based Bryant should mean next year is even better. The £556m deal is expected to be earnings enhancing in the first year and should save £15m a year in costs. Along with adding volume, Bryant is expected to improve margins at Taylor Woodrow - something the company has been slow to do so far.

There are a few concerns. One is that combined debt will leave Taylor Woodrow geared at more than 40 per cent. There are also worries that the company's US business will be stung by the economic downturn there.

However, most believe house building will come back later in the year in America. And in the UK, there could hardly be a better time to be a house builder, given current low interest rates. With earnings per share in 2001 forecast at 29.6p the stock carries a forward p/e ratio of just 6.8. Buy.

Aegis Group

With all the doom and gloom that has swirled around the advertising industry in recent months, Doug Flynn, the chief executive of Aegis Group, the media and market research firm, couldn't have picked a better time to report solid 2000 results and record new business wins. Underlying pre-tax profit advanced 21 per cent to £78.4m, while net new business billings jumped to more than $2bn (£1.4bn) from $1.2bn in 1999.

Given the unsustainable gains enjoyed by the advertising industry last year, Mr Flynn is right to council that a return to the long run average annual growth rate of 5-6 per cent is no bad thing. The focus for Aegis over the next year will be two-fold: Continue its robust gains in winning new business, while controlling the cost base as it grows into a global media buying giant.

On consensus earnings per share of 5.56p in 2001, Aegis stock, up 4.5p to 127.5p, carries a prospective p/e ratio of 22. That's good value.

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