Wolseley may have plumbed the depths but recovery is due

The stock market would seem to think so. Shares in the world’s largest plumbing supplier have risen by nearly three quarters from the eight-year low they touched in July – the day when the company announced the scrapping of its final dividend. Their latest advance, the biggest gain in the FTSE 100, came with yesterday’s full-year results – despite the mere indication that the deterioration in American and European construction markets that had brought the company so low is about to change. The best that Wolseley could offer is that US commercial and industrial markets – many of which are still benefiting from capital commitments made in better days – are expected to remain stable for the next few months. The majority of its markets – principally those exposed to housebuilding – are set to deteriorate further in the short term.

Wolseley, often touted as a rights issue candidate, said that it did not need to raise fresh equity for now. Secondly, it has begun a “fundamental review” of Stock, its loss-making US building supplies business, where it has already cut four fifths of the workforce.

The more likely option is that Wolseley retains those territories with sound longer-term growth potential – for instance California, Florida and Texas, which are forecast to benefit from continued internal migration – and jettison those, such as the upper Midwest, thought to be in steady decline. Tighter management of working capital, property disposals and a moratorium on acquisitions meant that the company was able to keep net debt steady at £2.5 billion – despite a £320 million rise in its reported borrowings from the appreciation of the euro. With Wolseley now being explicitly run for the maximisation of cash – a radical about-turn from its previous financial year, when it spent £1.7 billion on acquisitions – that burden should start to ease.

At 470p, or 12 times this year’s earnings, the shares provide a vivid illustration of the stock market’s willingness to discount more bad news: investors expect a recovery that Wolseley’s management has yet to detect.