Cement giant CRH (LSE: CRH) and plumbing and heating firm Wolseley (LSE: WOS) have a combined market cap of nearly 20bn, and a strong presence in both the UK and US markets.
One winner, one loser
Wolseleys share price has risen by 110% over the last five years. Despite paying no dividend in 2009 and 2010, the firms dividend payments since 2011 have contributed to a five-year average annual total return of 20% nearly double the 11% provided by the FTSE 100.
Things havent gone so well for CRH. The firms share price has fallen by 20% from its March peak and is currently at 2009 levels. CRHs dividend has also remained flat since it was cut in 2009, making the firms current 3.5% yield look less attractive than it might do otherwise.
Is there betterto come?
Heres a snapshot of the valuation of our two firms:
Wolseley |
CRH |
|
2014 forecast P/E |
17.2 |
21.1 |
2015 forecast P/E |
15.0 |
15.9 |
2014 forecast yield |
2.5% |
3.7% |
2015 forecast yield |
2.8% |
3.7% |
Both firms already have a decent level of growth priced into their shares, in my view.
I suspect that CRHs share price is partly supported by its dividend yield, but 21 times forecast earnings seems very expensive to me, especially as CRHs operating margin has fallen from 8.8% in 2008, to just 2.0% during the first half of this year.
In contrast, Wolseleys operating margin has recovered strongly since 2009, and reached an impressive 5.0% during the first half of this year. However, Wolseleys strong share price performance has pushed the firms yield below the FTSE 100 average of 3.4%, making it less attractive to income buyers.
Sell or hold?
In my view, neither of these firms is a buy, but for existing holders, the decision is more difficult.
Wolseleys business looks healthy, with attractive profit margins, strong dividend growth and low debt levels. Now might be a good time to lock in some capital gains, but for long-term investors, I think Wolseley remains a solid hold.
CRH is in the middle of a 2bn divestment programme aimed at selling non-core businesses which account for 20% of the firms assets, but only 10% of its earnings. This should help improve profit margins, but in my view potential gains are already reflected in the share price.
Im concerned by CRHs apparent failure to profit from the recovery of western construction markets: personally, Id sell the cement giant, as I believe there are better buys elsewhere.
Where should you look?
Most property-related shares have recovered strongly over the last few years, and weve already seen housebuilders wobble as lending restrictions and interest rate fears bite.
In my view, investors should now be looking for new opportunities to outperform the property market, such as the three stocks highlighted in “The Motley Fool’s Three Shares To Beat Property“.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.