Wolseley Needs To Focus On What It Does Best (U.S. Distribution)

It's hard to find fault with Wolseley's (OTCQX:WOSYY) (WOS.LN) recent performance. The UK shares are up more than 30% over the past year, outdoing peers like HD Supply (NASDAQ:HDS) (up almost 28%), Home Depot (NYSE:HD) (up around 13%), Lowe's (NYSE:LOW) (up about 11%), and Watsco (NYSE:WSO) (also up about 11%), not to mention others like Travis Perkins (OTCQX:TPRKY). Helping the cause has been strong growth in the U.S. business, with like-for-like growth steadily in the mid-single digits despite deflationary pressures, as the company continues to grow share.

There are certainly more ways for Wolseley to improve. Fixing, or better still selling, the businesses outside North America would likely be a good long-term move, and give the company some extra capital with which to pursue growth initiatives in the U.S. like expansion into adjacent distribution/MRO markets. What's more, the remodeling market should continue to support growth while a recovery in the industrial sector will be a welcome tailwind. The hang-up, as is so often the case, is with valuation. While the shares don't seem unreasonably priced on an EV/EBITDA basis, the free cash flow outlook is not as strong, and it's hard for me to regard this as much more than a hold.

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Wolseley Needs To Focus On What It Does Best (U.S. Distribution)