Broker snap: Jefferies keeps 'underperform' rating for Wolseley

Jefferies has reiterated its 'underperform' rating for plumbers merchant Wolseley despite a strong performance in the US driving annual results ahead of expectations.Earnings per share of 181.8p were up 8% year-on-year in the 12 months to July 31st and came in 3% ahead of consensus estimates. Jefferies pointed out that this was due to an "excellent" performance in the US. While like-for-like (LFL) trends continued to improve in the UK as the group benefitted from an atypical British summer, the broker said that underlying margins were depressed. Elsewhere, LFL sales continued to fall in France, the Nordics and Central Europe.However, the broker highlighted that the company's statement contained more overt references to US new residential markets than before. "Though this could simply be a reflection of the increasing size after a period of growth, we are mindful that it could perhaps indicate a shift in management focus towards these higher growth/lower margin markets," it said.While Jefferies admitted the temptation to focus on these markets is clear - new residential markets are expected to account for half the growth in US construction over the next five years - it said that margins would suffer as a result: "Higher growth does not come without cost."As for the £300m special dividend announced on Tuesday, Jefferies said it would have preferred Wolseley to use the cash for mergers and acquisitions. "We continue to favour increased acquisitions in the US, where the group is the clear market leader, in an industry that remains largely unconsolidated, allowing it to better leverage its greater size and operational efficiencies."A 2,510p target price for the stock has been maintained.Shares were up 2.28% at 3,270p by 09:31 on Tuesday.BC