Heading across the Pond to profile a UK-based building materials distributor with a unique business model and expanding network of efficiently-run depots.
Hi Todd, This is a higher quality business than people appreciate and I agree that the reporting/management communication is excellent. Worth noting that Matthew Ingle has family pedigree in the joinery/timber trade- while it's not a family owned business there are cultural similarities. His book, Kitchens, or Sink, is worth reading.
FWIW, I don't see them attempting a US expansion. Management are a conservative bunch and they see the French expansion as a learning exercise. If it really gains traction there, that would keep them busy for 10+ years anyway.
Finally, it's worth noting that the depots take about 7 years to reach maturity. If they were to stop expanding the network and allow the existing depots to mature operating margins would easily trend towards the high teens.
I'm quite bullish on this business- there's a nice balance here between growth, dividends and buybacks and management and strategy are both proven. My best bet is that UK consumer confidence improves over the next couple of years, but regardless this is a business with a proven ability to weather a cycle and the balance sheet is very strong.
Thanks, George! Appreciate the additional insights. Yes, I agree that France is the focus and should be so in the coming years. The US move would be an aggressive one, but potentially lucrative in the long-run for the reasons noted above. There's really nothing like it here and the market is obviously huge. Wren's seems to be investing aggressively in the Northeast. It's a different model from Howdens, of course, but could be evidence that an opportunity exists. I can tell you from personal experience that I would welcome a cheaper, more efficient alternative to buying kitchens in the US. :)
Sep 15, 2023·edited Sep 15, 2023Liked by Todd Wenning
No problem Todd! I reckon Howdens will be happy to let others tackle the US while they continue to take share in the UK trade market, pay down the last of the old MFI pension, pay dividends and do occasional buybacks and tuck-in acquisitions. They won't be at all bothered by what Wren or anyone else is up to. Surprised that there isn't a direct US comparison though...
Having gone through near death experiences when it was the trade arm of MFI and again in the Galiform days I think they rather enjoy sitting on a cash buffer of £250mm and growing the depot footprint at a more moderate pace- as I say, a conservative bunch but they do the important stuff extremely well.
Good to know the history, thanks. It's interesting how a company's history (facing bankruptcy, for example) can impact its strategy many years later. That was also the case with homebuilder NVR here in the US.
They can indeed do well sticking with UK/France/Ireland. Would hate to see them miss an opportunity in the US if it's there - they would know better than I would, of course.
There's not a direct US comparison in terms of the small depot, trade-only model. Home Depot is a comparison, of course, but they're also serving retail customers and are managing store sizes 10x+ those of a Howdens.
Interesting you mention NVR. One of the UK house builders, Vistry, appear to be pivoting to a similar model. A handful of US activists on the register, ex NVR man on the board and they put out an investor presentation recently saying they’ll retire about 1/3 of the share count in 3 years and get to 40% ROCE. Very punchy but they have a huge land bank which I think they can shift quite easily. Messy backstory but if someone manages to run the NVR playbook in the UK it will absolutely fly as nobody will pay more than 12x for a house builder over here so the buybacks will really pay off.
Oh that is interesting. NVR's advantage is two parts - one is the option-only land strategy, the second is the network of manufacturing centers that supply their communities. Is Ventry pursuing an asset-light, option-only land strategy? You should look at Dream Home Finders in the US if you're looking for another comp. Cloning the NVR playbook on option-only land, but don't have the manufacturing centers.
Enjoyed the post and welcome to the Newsletter publishing world, Todd!
I am based in the U.K., maybe a bit spoiled by cheap stocks here, so am tilted more towards value over quality. Not an owner at the moment, but keeping it on my watchlist.
Great writeup! Well done. I have reviewed this business before and I really like how you broke it down and structured the flow 🙌. I am waiting for a while now for this stock to drop, but it's holding up pretty well, unfortunately !
Thanks! Yes, I like Ferguson as one of these distributors sitting in between fragmented supplier and customer bases. Plumbing isn't going to be disrupted, either.
Loved your bottom line "It’s important to build a roster of great companies in your mind, regardless of valuation. For one, you never know when you might get an opportunity to pounce on short-term weakness"
Great reading, thanks and good luck on the premium service!
Hi Todd, This is a higher quality business than people appreciate and I agree that the reporting/management communication is excellent. Worth noting that Matthew Ingle has family pedigree in the joinery/timber trade- while it's not a family owned business there are cultural similarities. His book, Kitchens, or Sink, is worth reading.
FWIW, I don't see them attempting a US expansion. Management are a conservative bunch and they see the French expansion as a learning exercise. If it really gains traction there, that would keep them busy for 10+ years anyway.
Finally, it's worth noting that the depots take about 7 years to reach maturity. If they were to stop expanding the network and allow the existing depots to mature operating margins would easily trend towards the high teens.
I'm quite bullish on this business- there's a nice balance here between growth, dividends and buybacks and management and strategy are both proven. My best bet is that UK consumer confidence improves over the next couple of years, but regardless this is a business with a proven ability to weather a cycle and the balance sheet is very strong.
Thanks, George! Appreciate the additional insights. Yes, I agree that France is the focus and should be so in the coming years. The US move would be an aggressive one, but potentially lucrative in the long-run for the reasons noted above. There's really nothing like it here and the market is obviously huge. Wren's seems to be investing aggressively in the Northeast. It's a different model from Howdens, of course, but could be evidence that an opportunity exists. I can tell you from personal experience that I would welcome a cheaper, more efficient alternative to buying kitchens in the US. :)
No problem Todd! I reckon Howdens will be happy to let others tackle the US while they continue to take share in the UK trade market, pay down the last of the old MFI pension, pay dividends and do occasional buybacks and tuck-in acquisitions. They won't be at all bothered by what Wren or anyone else is up to. Surprised that there isn't a direct US comparison though...
Having gone through near death experiences when it was the trade arm of MFI and again in the Galiform days I think they rather enjoy sitting on a cash buffer of £250mm and growing the depot footprint at a more moderate pace- as I say, a conservative bunch but they do the important stuff extremely well.
Good to know the history, thanks. It's interesting how a company's history (facing bankruptcy, for example) can impact its strategy many years later. That was also the case with homebuilder NVR here in the US.
They can indeed do well sticking with UK/France/Ireland. Would hate to see them miss an opportunity in the US if it's there - they would know better than I would, of course.
There's not a direct US comparison in terms of the small depot, trade-only model. Home Depot is a comparison, of course, but they're also serving retail customers and are managing store sizes 10x+ those of a Howdens.
Interesting you mention NVR. One of the UK house builders, Vistry, appear to be pivoting to a similar model. A handful of US activists on the register, ex NVR man on the board and they put out an investor presentation recently saying they’ll retire about 1/3 of the share count in 3 years and get to 40% ROCE. Very punchy but they have a huge land bank which I think they can shift quite easily. Messy backstory but if someone manages to run the NVR playbook in the UK it will absolutely fly as nobody will pay more than 12x for a house builder over here so the buybacks will really pay off.
Oh that is interesting. NVR's advantage is two parts - one is the option-only land strategy, the second is the network of manufacturing centers that supply their communities. Is Ventry pursuing an asset-light, option-only land strategy? You should look at Dream Home Finders in the US if you're looking for another comp. Cloning the NVR playbook on option-only land, but don't have the manufacturing centers.
This is a great write-up.
The annual report is indeed wonderful and should be a model for many companies.
This is neither an “owner-operator" model neither a family-owned company but they managed to create and maintain a great culture.
The name was mentioned by Meryl Witmer in a Barron's Roundtable in 2017.
Thanks for letting me know! I'll have to pull up that Barron's Roundtable
Great piece Todd. Especially loved the flywheel diagram... you explain the virtuous circle in the biz extremely clearly.
Thanks, Ed!
Nice write up. I've liked Howdens for a while, but it does look fully priced.
I like companies with a strong corporate culture, decentralised management and employee participation
Do you know any others that tick those boxes?
A company like Fastenal (FAST) or IDEX (IEX) would be worth a look if that's what you're after.
Interesting write up, but not sure about the low level of insider ownership
Enjoyed the post and welcome to the Newsletter publishing world, Todd!
I am based in the U.K., maybe a bit spoiled by cheap stocks here, so am tilted more towards value over quality. Not an owner at the moment, but keeping it on my watchlist.
Great writeup! Well done. I have reviewed this business before and I really like how you broke it down and structured the flow 🙌. I am waiting for a while now for this stock to drop, but it's holding up pretty well, unfortunately !
This was a great read! You got straight to the core of this business and hit a ton of relevant points in a nice concise post!
You might be interested in Ferguson, although it’s certainly not being flown over.
Thanks! Yes, I like Ferguson as one of these distributors sitting in between fragmented supplier and customer bases. Plumbing isn't going to be disrupted, either.
I have had this stock for long time as I have been an indirect customer of theirs in the UK. I learned a lot from this excellent write -up .
Thanks, Sanjiv!
Loved your bottom line "It’s important to build a roster of great companies in your mind, regardless of valuation. For one, you never know when you might get an opportunity to pounce on short-term weakness"
Great reading, thanks and good luck on the premium service!