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)

HD Supply Looking To Potentially Play Multiple Trump

While the recent downturn hammered industrial-exposed distributors like MSC Industrial (NYSE:MSM), Fastenal (NASDAQ:FAST), and Grainger (NYSE:GWW), HD Supply (NASDAQ:HDS) was more or less able to go about its business and continue growing. Due to its much different end-market exposures (facilities maintenance, water, and construction), HD Supply has continued to grow revenue and expand its margins, leading to a meaningful outperformance over the last three years relative to the likes of MSC, Fastenal, Grainger, and Wolseley (OTCQX:WOSYY) (with which it shares more in common).

Looking ahead, even though non-residential construction seems to be slowing and water infrastructure spending continues to click along at a slow pace that frustrates its bulls, I think HD Supply could still have potential catalysts to drive higher revenue and earnings. HD Supply would be a meaningful beneficiary of a lower corporate tax rate and would likewise be well-placed to benefit from the incoming administration's pledges to significantly increase federal spending on infrastructure. Projecting real numbers on the basis of campaign pledges is always a tricky business, and I haven't changed my tax rate assumptions yet, but if this administration delivers, it could support a fair value of $50 or higher for this distributor.

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HD Supply Looking To Potentially Play Multiple Trump

Seeking Alpha: HD Supply Outgrowing Its Markets At An Accelerating Rate

I liked HD Supply (NASDAQ:HDS) as a play on recovering construction and infrastructure markets back in March, but I wasn't expecting a nearly 25% move in the shares over the next six months. This was not just a "rising tide lifts all boats" sort of move either - industrial distributor MSC Industrial (NYSE:MSM) and electrical distributor WESCO (NYSE:WCC) are both up over that period as well, but only by about 3% and 5%, while Rexel (OTCPK:RXEEY), Wolseley (OTCQX:WOSYY), and Fastenal (NASDAQ:FAST) are in the red over that stretch. What has helped HD Supply greatly is that management is delivering on its guidance and establishing credibility with its plans to outgrow its underlying markets by a meaningful amount over the next few years.

I still believe that HD Supply is more of a momentum play than a value story. Even with expectations of a construction/infrastructure recovery and internal growth initiatives supporting double-digit growth over the next five years and long-term sales growth of 8%, I can't really get to an attractive discounted cash flow number. I don't expect that to matter much, though, so long as the company can continue to deliver above-market growth and ongoing margin leverage.

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HD Supply Outgrowing Its Markets At An Accelerating Rate

Seeking Alpha: HD Supply Seeing A Turn In Non-Residential Construction

It may yet be early for all-clear on HD Supply (HDS), as "green shoots" could easily get trampled, but the company does seem to have its guidance dialed in better and underlying results are looking better. There's still some comp-group noise that has me questioning the sell-side's apparent love for this stock, but the valuation and opportunity seem in reasonable alignment these days.

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HD Supply Seeing A Turn In Non-Residential Construction

Seeking Alpha: Wall Street Slow To Abandon HD Supply's Long-Term Story

Covering HD Supply's (HDS) first quarter, I thought that the company was a solid collection of assets with real upside to a recovery in construction and internal operating margin improvement, but I thought the valuation was a little rich. I remarked that the shares would be more interesting at $20, and sure enough investors had a couple of days in which they could have bought below that level.

Since then the shares are up 10% even though the company is not doing particularly well staying on target with respect to sell-side estimates. Even though the company reset revenue expectations lower once again, and a change in CFOs so soon after an IPO is alarming, it looks like investors are more focused on the EBITDA margin improvement and the long-term prospects. I still believe that there are better options in the distribution sector, but I'll also acknowledge that Wall Street *wants* to like this story and there's room for both operating results and multiples to head higher.

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Wall Street Slow To Abandon HD Supply's Long-Term Story

Seeking Alpha: HD Supply An Expensive Play On Construction And MRO

Admittedly, I have a thing for the industrial/MRO distribution sector - I own MSC Industrial (MSM) and follow others like Fastenal (FAST), Grainger (GWW), and WESCO (WCC) pretty closely. Although it's a very competitive space with a strong cyclical component, it's a fragmented market where companies with a good business plan (e.g. MSC Industrial and Fastenal) can really make a name for themselves.

Into this mix comes one of the bigger dogs in the yard - HD Supply (HDS). Once part of Home Depot (HD) and then sold to private equity, HD Supply has already enjoyed a pretty good post-IPO run, rising about one-third since its debut. Although I do appreciate the leverage that HD Supply offers to a U.S. construction rebound, not to mention margin improvement and consolidation potential, I think the multiple today is demanding unless you are really bullish on the company's growth plans and the recovery potential of the U.S. construction market.

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HD Supply An Expensive Play On Construction And MRO