Wolseley provided a trading update for the first 11 months of its fiscal year earlier this week, in advance of its full-year earnings, and the results fell in line with our expectations. Revenue fell around 1.5%, although the drop was largely mitigated by a favourable currency translation effect, since sales sank 16% on a constant currency basis. The top-line comparison was also restated to exclude the results of the recently divested Stock Building Supply business up to the date of disposal.
While the demand environment remains challenging across the firm's segments, management offered a number of encouraging comments. First, it stated that the new residential markets are showing signs of stabilisation although they are unlikely to stage a quick recovery. In addition, the repair and remodel market continues to decline, albeit at a slower rate.
Although these positive anecdotes are promising, we still believe near-term demand will remain pressured, since the commercial and industrial end markets continue to deteriorate. That said, Wolseley's aggressive head-count reductions, recent rights offering, and the announcement that the firm plans to sell off its Belgium, Slovakian, and Czech Republic businesses should help the company survive the current storm. We have increased our top-line assumptions for 2010 to account for a stronger recovery than we had previously anticipated and have also added the effect of a favourable movement in currency. As a result, we have increased our fair value estimate.
Anthony Dayrit is a Morningstar associate stock analyst based in the United States.
