Wolseley’s stock hits seven-year low

-- Industrial Distribution, 7/1/2008 12:34:00 PM

The severe downturn in the housing market has resulted in British distributor Wolseley, the world’s largest distributor of plumbing, MRO and construction products, to be at risk and breach its banking covenants, according to an analyst quoted in the Telegraph, a British newspaper. This past week, Wolseley’s stock hit a seven-year low.

Analyst Jessica Flounders downgraded Wolseley’s stock to underweight from equal weight and said the company’s “balance sheet needs to be addressed.”

“The company may be able to strengthen the capital structure through asset disposal and further cost cutting, but these will eat into the growth of the businesses,” she told the newspaper. “Other options are a dividend cut or capital raising.”

In the past 18 months, Wolseley, through its Stock Building Supply and Ferguson units in the United States, has eliminated thousands of jobs. More cuts are expected before the end of the month.

Another British analyst commented on Wolseley’s cash problems in a Financial Times article.

“We think Wolseley’s current financial structure is unsustainable,” John Messenger of ABN Amro said in a note in which he downgraded the stock to sell. “If Wolseley holds off on restructuring its balance sheet, we remain of the view that net debt to EBITDA [earnings before interest, taxes, depreciation and amortization] covenants will be breached unless management has significant levers which make sense for both the short- and long-term value of the group.”

The same article reported that the Wolseley Group is said to have examined shoring up its balance sheet by selling its loss-making U.S. lumber business (Stock Building Supply).

Last month, cash call fears about Wolseley caused Goldman Sachs and Morgan Stanley to cut their recommendations.

Wolseley has been hit hard by the housing crisis in Europe and the United States. Half of the company’s revenues come from sales in the U.S., primarily from Stock Building Supply and Ferguson, which primarily sells plumbing and heating supplies.  

Wolseley rankd first on Industrial Distribution's 2008 Big 50 report, with sales of $31.6 billion.