Nelson Peltz is a billionaire whose net worth is estimated at $1.7 billion. We took a deep dive into his portfolio and found an astonishing finding. He bet over 30% of his portfolio on a single stock, a plumbing and heating products distributor.
Here’s the skinny on his full portfolio holdings:
- Ferguson: 30.4%
- Invesco: 20.1%
- Janus Henderson: 17.0%
- Sysco: 13.4%
- Wendy’s: 12.5%
- General Electric: 6.6%
So what makes Ferguson so special to deserve to be his flagship holding?
Why Is Ferguson a Good Investment?
Ferguson, a century-old plumbing and heating product distributor operates in North America via almost 1,700 branch locations.
In the last 6 months, the company has reported highly impressive revenue growth. In the last 6 quarters, year-over-year growth has been scintillating.
- Q2 2021: 17.8%
- Q3 2021: 30.7%
- Q4 2021: 26.6%
- Q1 2022: 31.8%
- Q2 2022: 23.1%
- Q3 2022: 21.4%
- Q4 2022: 16.6%
Not only that but Ferguson pays a handsome 2.11% dividend yield and has a payout ratio of 24.94%, suggesting it’s very sustainable. On top of the fast growth and attractive dividend yield, management has been on a tear buying back stock, which is acting as a tailwind to support both FERG share price and its dividend.
One reason Ferguson is growing so rapidly is its building a moat as a leading distributor in numerous markets. As a dominant player it enjoys advantages that come with economies of scale. And that in turn is translating to rapidly growing operating income.
- Q1 2021: $320M
- Q2 2021: $520M
- Q3 2021: $670M
- Q4 2021: $738M
- Q1 2022: $553M
- Q2 2022: $712M
- Q3 2022: $815M
- Q4 2022: $833M
When operating income grows by almost 3x over the space of two years, you can expect the market to respond and it has. From share price lows near $100 in Q4 last year, Ferguson has appreciated by almost 40%.
Ferguson is Evolving For The Better
Having got stumped in 2008 from poor sales concentration, Ferguson now has a mix of residential and non-residential housing that is almost even split. And while new constructions represent about 40% of revenues – arguably a concern during an economically weak period – management has stated that it believes the US Housing units are showing a deficit of 3.5 million. In short, a big opportunity for Ferguson over the coming years.
For investors concerned about the impact of a revenue stream tied cyclically to the economy, solace comes in the form of the bulk of revenues for the company stemming from Repair, Maintenance, and Improvement. During the Great Recession, this part of the business represented just about a third of its top line sales whereas now it’s closer to two thirds. Clearly, it was a smart management decision to bolster this part of the sales composition to cushion the blow from economic downturns.
The company’s scale advantage also means it can acquire customers and talent rapidly without having to grow its presence organically in each market. This strategic approach has allowed the company to establish a presence in numerous markets, four of which it ranks as the #1 player, two of which it ranks #2 and three of which it ranks #3.
What makes this strategy appealing is that Ferguson operates in highly fragmented market, so there is a virtually endless list of small operators it can acquire and add to its ever-expanding product and service portfolio. As it does so, it further grows its moat in each market it serves. It may not be a pretty business but almost a billion dollars of operating profit per quarter is nothing to sneeze at and suggests Ferguson could have a long way to go to realize its full valuation potential.