Morning Note: Market news and updates from Ferguson and CrowdStrike

Market News

Treasuries moved higher after US labour market data fueled Fed rate-cut bets. Swaps are now fully pricing in a 25 basis points cut in November, up from December. The 10-year currently yields 4.35%, while gold is $2,330 an ounce. UBS boosted its yearly gold price forecasts out to 2028 – it now expects the metal to average $2,700 an ounce next year amid strong demand from global central banks.

US equity markets ticked higher last night – S&P 500 (+0.2%), Nasdaq (+0.2%) – with strong results from HP and CrowdStrike (see below). This morning in Asia, markets drifted lower: Nikkei 225 (-0.9%); Hang Seng (-0.1%); Shanghai Composite (-0.8%). Japan’s base pay jumped 2.3% from a year ago, the largest margin in three decades. Caixin China services PMI came in at 54.0, ahead of the 52.5 expected. The composite PMI of 54.1 was a 10-month high.

The FTSE 100 is currently trading 0.3% higher at 8,253, while Sterling buys $1.2770 and €1.1743.

The oil price moved to a 4-month low of $77.50 a barrel on signs of rising US stockpiles.

One source of future inflation is container and bulk shipping rates which may rise later this year due to the Houthi attacks, Greek shipowner Evangelos Marinakis said.

Source: Bloomberg

Company News

Yesterday lunchtime, Ferguson released results for the three months to 30 April 2024, the third quarter of its financial year to 31 July 2024, which highlighted a return to volume growth. The company said that the year is progressing largely as expected but trimmed its margin and capex guidance. The company has also raised its share repurchase programme. In response to this update, the shares were little changed in yesterday’s session.

Ferguson (formerly Wolseley PLC) is a leading specialist distributor in North America, providing expertise, solutions and products from infrastructure, plumbing, and appliances to HVAC, fire, and fabrication. The group sells to customers across residential, commercial, and industrial sectors, with revenue derived from a mix of new construction and repair, maintenance, and improvement (RMI). The business is exposed to several positive structural trends, such as an ageing population, smaller households, and the ageing housing stock, all of which drive demand for new housing and remodelling. The market for the group’s products is exposed to the economic cycle, in particular levels of activity in new construction and property repair. In FY2023, Ferguson generated sales of almost $30bn, versus an estimated market opportunity of $340bn.

The company reports in US dollars and has its primary share listing in the US. It now plans to domicile the ultimate parent company in the US, with the change to be effective in August.

During the latest quarter, revenue grew by 2.4% to $7.3bn. On an organic basis, sales fell by 0.9%, an improvement from the previous quarter. Weakness in certain commodity-related categories persisted, driving modest overall price deflation of 2%. Consequently, volumes on an organic basis were up 1%.

The largest business, the US (95% of revenue), fell by 0.9% in organic terms, with adjusted operating profit up 3.2% to $685m. Residential end markets, which comprise just over half of US revenue, remained muted, but showed a slight sequential improvement from the previous quarter. Non-residential end markets showed comparative resilience. Commercial activity was solid, while industrial was slightly down against strong comparables. In Canada, revenue fell by 0.6%, in organic terms, with profit falling from $7m to $6m.

The group’s gross margin was up 50 basis points to 30.4%, driven by strong price contribution. Operating expenses were ‘appropriately managed’ against volume growth as the group continued to focus on productivity initiatives and investment in core capabilities for future growth. The adjusted operating margin was unchanged at 9.2%. As a result, adjusted operating profit grew by 2.6% to $674m, while EPS rose 5.5% to 232c due in part to the impact of share repurchases.

The group continued to invest in organic growth, with capital expenditure of $263m so far this year, albeit guidance for the full year was reduced from $400m-$450m to $350m-$400m. So far in this financial year, the group has generated free cash flow of $1,274m and ended the latest quarter with financial gearing of 1.0x net debt to EBITDA, at the bottom end of the target range of 1.0x-2.0x. The group has continued to consolidate its markets with eight bolt-on acquisitions so far in this financial year to date with aggregate annualised revenue of around $350m.

The group declared a quarterly dividend of 79c, an increase of 5%. A similar rise at the full-year stage would generate a yield of 1.6% at the current share price. During the latest quarter the group bought back $171m of its shares. Considering its prospects and strong financial position, the company has extended its share repurchase programme by an additional $1.0bn, resulting in a remaining outstanding balance of $1.1bn.

Looking forward, FY2024 guidance has been reiterated for net sales (to be broadly flat) but reduced slightly for adjusted operating margin (from 9.2%-9.8% to 9.2%-9.6%). This reflects continued volume growth and resilient gross margin despite the impact of continuing mild deflation expected for the remainder of the year.

Source: Bloomberg

Last night, CrowdStrike Holdings released results for the first quarter of its financial year ended 31 January 2025 which highlighted another exceptionally strong quarter. The group raised its guidance for the full financial year and in response the highly-rated shares were marked up by a further 6.5% in after-hours trade.

CrowdStrike is a US-listed cybersecurity technology company with annual revenue of more than $3bn. The CrowdStrike Falcon platform protects customers against cyber-attacks across on-premise, virtualised, and cloud-based environments running on a variety of endpoints such as laptops, desktops, servers, virtual machines, and Internet of Things devices.

The CrowdStrike Threat Graph aggregates security data across its customer base, using advanced AI techniques to create a security solution able to constantly adapt to new threats and attacks. As the company grows, its access to security data will also grow, enhancing its competitive position. The AI-native Falcon XDR platform has become the cybersecurity consolidator of choice.

The business is well placed to benefit from secular trends, such as digital and security transformation, cloud adoption, and a heightened threat environment, which the current geopolitical uncertainty has clearly exacerbated. The 2024 CrowdStrike Global Threat Report highlighted a surge in adversaries leveraging stolen identity credentials. However, at present, Cloud Security Spend is only around 1% of Cloud IT Spend, well below what is considered necessary. The total addressable market is estimated to be $100bn in 2024, rising to $225bn in 2028.

The group offers more than 20 cloud modules via a software as a service (SaaS) model that spans multiple large security markets, including corporate workload security, security and vulnerability management, managed security services, IT operations management, and threat intelligence services. The group continues to add new modules organically and via M&A. The success of the group’s platform strategy and its growing brand leadership have led to a groundswell of customers turning to CrowdStrike as their trusted security platform of record.

In the three months to 30 April 2024, total revenue grew 33% to $921m, above the company’s guidance range ($902m-$906m) and the market expectation ($905m). Annual subscription revenue grew by 34% to $872m, while professional services grew 18% to $49m. Annual Recurring Revenue (ARR) increased 33% to $3.65bn as of 30 April, of which $212m was added in latest quarter. The company’s vision is to reach $10bn in ARR over the next five to seven years.

The company unveiled new Cloud Detection and Response innovations and launched Falcon for Defender augmenting Microsoft Defender deployments to stop missed attacks. It also recently expanded its partnership with Amazon Web Services to accelerate cybersecurity consolidation and cloud transformation.

Gross retention rates remain high, while the number of subscription customers that have adopted five or more modules, six or more modules, and seven or more modules increased to 65%, 44%, and 28%, respectively, as of 30 April.

The business has strong operating leverage, with subscription gross margin holding steady at 80%, and achieved vastly improved operating profitability, rising from $116m to $199m. EPS rose from 57c to 93c, well above the company guidance of 89-90c and the market forecast of 89c. The group generated record free cash flow of $322.5m (up 42%) and ended the quarter with cash and cash equivalents of $3.7bn.

CrowdStrike has raised its guidance for FY2025, with the estimates reflecting the group’s technology advantage and strong industry tailwinds. The group now expects revenue of $3,976m-$4,011m, (vs. $3,925m-$3,989m previously) and EPS of 393c-403c (vs. 377c-397c previously).

Source: Bloomberg