Exchange: NYSE | Sector: Industrials | Industry: Industrial Distribution
Q1 2025
Published: Dec 10, 2024
Earnings Highlights
Revenue of $7.77B up 0.8% year-over-year
EPS of $2.33 decreased by 8.2% from previous year
Gross margin of 30.1%
Net income of 470.00M
"This year has largely started out as expected with volume growth offset by continued price deflation in commodity-based products." - Kevin Murphy
Ferguson plc (FERG) QQ1 2025 Results Analysis: Steady Volume Growth in a Deflationary Environment Amid HVAC Expansion and M&A Momentum
Executive Summary
Ferguson plc delivered a resilient QQ1 2025 performance, with net sales of $7.77 billion, up 0.8% year-over-year, supported by a 3% increase in total volume and 1.1% acquisition impact. Gross margin remained solid at 30.1%, while adjusted operating margin stood at 9.1% and adjusted diluted EPS was $2.45, down 7.5% year-over-year on lower profitability despite volume gains. Management attributed the modest margin pressure to ongoing commodity price deflation (~2%) and mix effects, notably a stronger HVAC initiative and waterworks growth that carry slightly lower gross margins but are positioned to drive longer-term share gain. The quarter featured intentional investment to support growth, including HVAC counter expansion, a robust trainee program, and large project teams, which added to near-term SG&A but are expected to yield higher leverage in a recovering volume environment.
From a cash and balance-sheet perspective, Ferguson generated $345 million of operating cash flow and $274 million of free cash flow in the quarter, funded capex of $77 million and returned $256 million to shareholders via share repurchases, while raising the quarterly dividend by 5% to $0.83 per share. Net debt stood at approximately $4.08 billion with a reported net-debt-to-adjusted-EBITDA multiple of about 1.2x, evidencing a solid balance sheet to fund growth and capital return. The company reaffirmed its fiscal 2025 guidance: low-single-digit net sales growth, mid-to-high-single-digit operating margins (9.0%–9.5%), capex of $400–$450 million, and an approximately 26% tax rate, with acquisitions contributing modestly to EPS and sales growth.
Management emphasized multi-year structural tailwinds in housing, data-center spending, and dual-trade contractor penetration (HVAC/plumbing), plus ongoing M&A to consolidate a fragmented market. The near-term outlook contemplates continued deflation headwinds in commodity-based products, but management signaled an eventual easing of deflation and a potential improvement in finished-goods pricing in the back half of 2025, which could support margin expansion as volumes recover. Overall, Ferguson remains well-positioned to outperform its markets through productivity, digital tools, and strategic investments, while maintaining flexibility to adjust cost structure if volumes deteriorate.
Key Performance Indicators
Revenue
7.77B
QoQ: -2.19% | YoY:0.83%
Gross Profit
2.34B
30.11% margin
QoQ: -4.92% | YoY:0.39%
Operating Income
665.00M
QoQ: -18.00% | YoY:-10.01%
Net Income
470.00M
QoQ: 4.21% | YoY:-9.44%
EPS
2.34
QoQ: 5.41% | YoY:-8.24%
Revenue Trend
Margin Analysis
Key Insights
Revenue (net sales): $7.772 billion, up 0.8% YoY; organic decline 0.3% offset by 1.1% acquisition growth; volume up ~3% (organic ~2%).
Gross margin: 30.1% (down 10 bps YoY).
Operating income: $665 million (operating margin 8.56%); adjusted operating profit: $706 million (adjusted margin 9.1%).
Net income: $470 million (net margin 6.05%); diluted EPS: $2.34 (GAAP) / $2.33 (adjusted).
Free cash flow: $268 million; operating cash flow: $345 million; capex: $77 million; cash balance end of period: $654 million; cash and equivalents: $601 million.
Financial Highlights
Revenue and profitability metrics (Q1 2025 vs. prior year):
- Revenue (net sales): $7.772 billion, up 0.8% YoY; organic decline 0.3% offset by 1.1% acquisition growth; volume up ~3% (organic ~2%).
- Gross margin: 30.1% (down 10 bps YoY).
- Operating income: $665 million (operating margin 8.56%); adjusted operating profit: $706 million (adjusted margin 9.1%).
- Net income: $470 million (net margin 6.05%); diluted EPS: $2.34 (GAAP) / $2.33 (adjusted).
- Free cash flow: $268 million; operating cash flow: $345 million; capex: $77 million; cash balance end of period: $654 million; cash and equivalents: $601 million.
- Shareholder returns: Dividends paid $158 million; share repurchases $256 million; share count reduced by ~1.3 million; leverage remained disciplined at ~1.2x net debt to adjusted EBITDA.
- Balance sheet and liquidity: total debt $5.64 billion; net debt $4.08 billion; total assets $16.86 billion; current ratio 1.68; debt-to-capitalization ~0.45; ROE 8.31%, ROA 2.79%, ROCE 5.98%.
- Embedded guidance: Net sales growth in the low single digits; acquisitions ~0.0–1.0% contribution; adjusted operating margin 9.0%–9.5%; capex guidance $400–$450 million; effective tax rate ~26%; interest expense $180–$200 million.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
7.77B
0.83%
-2.19%
Gross Profit
2.34B
0.39%
-4.92%
Operating Income
665.00M
-10.01%
-18.00%
Net Income
470.00M
-9.44%
4.21%
EPS
2.34
-8.24%
5.41%
Key Financial Ratios
currentRatio
1.68
grossProfitMargin
30.1%
operatingProfitMargin
8.56%
netProfitMargin
6.05%
returnOnAssets
2.79%
returnOnEquity
8.31%
debtEquityRatio
0.83
operatingCashFlowPerShare
$1.72
freeCashFlowPerShare
$1.34
dividendPayoutRatio
33.6%
priceToBookRatio
6.99
priceEarningsRatio
21.01
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key takeaways from Ferguson's QQ1 2025 earnings call:
- Strategy and growth themes: Ferguson emphasized a strategic mix of organic growth, acquisitions, and investments in high-growth areas such as dual-trade HVAC plumbing, large capital projects (e.g., data centers), and geo-synthetics/soil stabilization growth. Management underscored the goal of delivering productivity for specialized professional customers while expanding value-added services and digital tools to raise efficiency and project outcomes.
- Operational performance and end-market mix: Kevin Murphy highlighted volume growth offsetting price deflation, with U.S. net sales up 0.5% and HVAC up 10% (driven by counter expansion) while waterworks rose 3% and residential trade plumbing grew 1%. On the non-residential side, large capital projects supported the top line even as traditional non-residential activity softened. Bill Brundage noted a ~3% total volume increase and ~2% organic volume, with continued commodity deflation dampening gross margins modestly. He also flagged SG&A deleverage in the first half due to scaling investments.
- Margin and pricing trajectory: Management acknowledged ongoing commodity deflation (~2%) and mix effects as drivers of near-term margin pressure, but anticipated prices to inflect positively in the second half as deflation eases and finished goods pricing recovers modestly. They expect the full-year operating margin to land between 9.0% and 9.5% despite a Q1 margin near the low end of that range.
- Capital allocation and balance sheet: Ferguson raised its quarterly dividend by 5% to $0.83 and deployed $256 million toward share repurchases, reducing share count by ~1.3 million. Capex totaled $77 million in Q1, aligned with HVAC counter expansion and supply chain automation. The company reaffirmed a strong balance sheet with net debt to adjusted EBITDA around 1.2x and a robust liquidity profile.
- M&A and pipeline: Fresno Pipe & Supply and Templeton were completed in QQ1, with a healthy acquisition pipeline and modest EPS impact expected from acquisitions in 2025. Management indicated continued consolidation of fragmented markets as a core growth pillar.
This year has largely started out as expected with volume growth offset by continued price deflation in commodity-based products.
— Kevin Murphy
We expect net sales to grow in the low single digit range based on our markets being down low single digits, inclusive of pricing being slightly down for the year driven by ongoing deflation in commodity-based products.
— Bill Brundage
Forward Guidance
Outlook and assessment:
- Revenue and profitability: Ferguson maintains a cautious but constructive 2025 outlook, targeting low-single-digit net sales growth and an adjusted operating margin range of 9.0%–9.5%. Management expects SG&A deleverage to improve in the second half as deflation eases and volumes strengthen, supported by ongoing price realization in finished goods (low single-digit price increases anticipated) and improved commodity deflation comparables.
- Volume and pricing dynamics: The company projects continued volume resilience driven by HVAC expansion, waterworks, and large capital project activity (data centers, municipal infrastructure). Finished goods pricing is expected to turn modestly positive in the back half of 2025, contributing to margin expansion as volumes rise.
- Capital allocation and financing: Capex guidance remains $400–$450 million, with a continued focus on HVAC counter expansion and supply-chain enhancements. M&A activity is likely to persist at a modest pace, contributing 1% or less to net sales growth and EPS over the year. The company intends to maintain leverage near the lower end of its target range while returning capital via dividends and buybacks.
- Key risk factors: The main near-term risk is ongoing commodity deflation and sector-specific softness in residential remodel and non-residential markets, which could suppress top-line growth and compress margins. A sharper-than-expected slowdown in housing or industrial capex, or escalation of tariffs and trade tensions, could adversely impact procurement costs and supply-chain dynamics. Investors should monitor: (i) sustainability of HVAC counter expansion ramp, (ii) tempo of large-capital project bidding and conversions (data centers, municipal projects), (iii) price recovery cadence for finished goods, and (iv) the pace of debt reduction versus acquisitions.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
FERG Focus
30.11%
8.56%
8.31%
21.01%
DXPE
31.50%
8.50%
4.63%
15.68%
AIT
29.60%
10.30%
5.25%
23.27%
GIC
34.90%
5.67%
4.72%
15.77%
MSM
40.70%
7.78%
3.39%
25.74%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Ferguson presents a balanced, moderately constructive investment case. The QQ1 2025 results underscore a company that is navigating a deflationary commodity environment while investing behind growth catalysts. The combination of volume growth, resilient gross margins, and disciplined capital allocation supports a positive medium-term earnings trajectory, particularly if housing recovers and large-cap projects remain robust. The HVAC expansion and dual-trade strategy offer structural upside via higher service content and improved contractor productivity, while the ongoing M&A path should provide incremental growth and geographic reach. Key investors should monitor the pace of price recovery in finished goods, the trajectory of commodity deflation, and the evolution of the data-center and municipal capex pipeline, all of which will influence the pace of margin expansion and free cash flow generation. Given Ferguson’s leverage policy, dividend growth, and substantial buyback activity, the stock may offer a favorable risk-adjusted return profile for exposure to United States industrial distribution with a multi-year growth runway.
Key Investment Factors
Growth Potential
Diversified end-market exposure supports resilience; HVAC counter expansion and dual-trade contractor strategy are positioned to capture higher-margin service opportunities and drive share gains as housing recovers and large-cap projects scale.
Profitability Risk
Commodity deflation remains a near-term headwind; housing/civil infrastructure cyclicality and project delays (including political/regulatory shifts) could dampen growth; integration and execution risk on acquisitions in a fragmented market.
Financial Position
Solid liquidity with a cash balance of approximately $654 million; net debt around $4.08 billion and net debt/adjusted EBITDA near 1.2x; strong free cash flow generation ($274 million in Q1) supports buybacks, dividends, and selective M&A. The balance sheet enables continued flexibility in capital allocation.
SWOT Analysis
Strengths
Large, diversified distribution network with 1,679 branches and significant scale to serve residential, commercial, and industrial end-markets.
Resilient mix with strong waterworks and data-center project exposure; HVAC expansion complements core plumbing capabilities.
Healthy balance sheet and cash flow profile enabling ongoing buybacks and shareholder returns.
Healthy M&A pipeline and recent acquisitions (Fresno Pipe & Supply, Templeton) advancing geographic and capability coverage.
Own-brand (private label) strategy contributing to margin resilience over time.
Weaknesses
Near-term margin pressure from commodity deflation and mix shift toward lower-margin growth initiatives (e.g., HVAC and waterworks).
Seasonality and weather-driven demand can lead to earnings volatility across quarters.
Current leverage still elevated given scale, exposing sensitivity to macroeconomic shocks.
Opportunities
Expansion of dual-trade contractor model and digital tools to improve productivity for customers.
Increased participation in high-growth, large-cap projects (data centers, municipal infrastructure) delivering above-market growth.
Continued consolidation of a fragmented market through bolt-on acquisitions and geographic expansion.
Strengthening private-label share to improve gross margins and pricing power.