Executive Summary / Key Takeaways

• Market Leadership and Strategic Focus: Ferguson Enterprises Inc. (FERG) stands as North America's largest value-added distributor for water and air specialized professionals, strategically shifting its focus entirely to this high-growth region. The company's balanced exposure to residential and non-residential markets, coupled with a multi-customer group approach, underpins its consistent market outperformance.
• Resilient Financial Performance Amid Headwinds: Despite persistent commodity-led deflation and subdued residential markets in fiscal year 2025, Ferguson delivered solid revenue growth of 3.8% and a 0.6% increase in adjusted operating profit, demonstrating effective cost management and strategic pricing actions.
• Targeted Growth Initiatives Driving Share Gains: Key investments in HVAC expansion, Waterworks diversification, and large capital projects (especially data centers and infrastructure) are yielding strong organic growth. The "HVAC everywhere" strategy and Waterworks' integrated solutions are critical differentiators.
• Robust Capital Allocation and Shareholder Returns: Ferguson maintains a strong balance sheet with ample liquidity, enabling continued investment in organic growth and strategic bolt-on acquisitions. The company actively returns surplus capital to shareholders through increasing dividends and share repurchases, reducing its share count by approximately 5 million in fiscal 2025.
• Positive Outlook with Easing Deflation: Management anticipates mid-single-digit revenue growth and an improved operating margin of 9.2% to 9.6% for calendar year 2025, driven by easing deflationary pressures, continued volume growth, and the realization of $100 million in annualized cost savings from recent streamlining efforts.

The Foundation of Growth: Specialization and Scale in North America

Ferguson Enterprises Inc. (FERG) has cemented its position as the preeminent value-added distributor for water and air specialized professionals across the vast North American construction market. Founded in 1953, the company strategically honed its focus on this region in the early 2000s, divesting European operations to concentrate on attractive domestic opportunities. This strategic pivot culminated in a corporate restructuring in August 2024, establishing Ferguson Enterprises Inc. as the ultimate parent company. Today, FERG's common stock trades on both the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE), reflecting its global stature with a North American core.

Ferguson's business model is inherently balanced, with residential and non-residential markets each contributing approximately half of its net sales. Within these segments, repair, maintenance, and improvement (RMI) activities account for roughly two-thirds of revenue, providing a stable base, while new construction comprises the remaining third. This diversification mitigates cyclical risks inherent in construction. The company's operational backbone includes an extensive network of 1,746 branches, 11 regional distribution centers, and six market distribution centers (MDCs), supported by approximately 5,900 fleet vehicles and 35,000 associates as of July 31, 2025. This formidable infrastructure enables Ferguson to source over 1 million unique products annually from approximately 37,000 suppliers, ensuring unparalleled product availability and efficient "last mile" delivery.

Competitive Landscape: Differentiated Value in a Fragmented Market

Ferguson operates within highly fragmented and competitive markets, facing a diverse array of rivals from large industrial distributors to specialized regional players and even direct-selling manufacturers. Key publicly traded competitors include W.W. Grainger, Inc. , Watsco, Inc. , and Lowe's Companies, Inc. .

Ferguson's competitive advantage is rooted in its deep specialization and localized service delivery. While W.W. Grainger (GWW) offers a broader industrial MRO catalog, Ferguson's focus on plumbing, HVAC, and water solutions allows for more tailored expertise and project-specific consultation. GWW's gross profit margin of 39% and operating profit margin of 15% in 2024 reflect its efficient supply chain for a wide product range, but Ferguson's specialized approach often translates to stronger relationships in its core trades. Ferguson's ability to integrate services like fabrication, valve actuation, and virtual design directly into complex projects provides a tangible edge, enhancing contractor productivity.

Against Watsco (WSO), a leading HVAC/R distributor, Ferguson's broader portfolio encompassing plumbing and infrastructure offers a more comprehensive solution for integrated projects. WSO's gross profit margin of 27% and operating profit margin of 10% in 2024 highlight its HVAC specialization. Ferguson's "HVAC everywhere" strategy, including dual trade counter conversions, directly addresses the growing segment of dual-trade contractors, allowing it to capture business that might otherwise be split between specialized providers. This multi-customer group approach fosters efficiency for customers needing diverse supplies, potentially leading to higher customer retention and market share in both plumbing and HVAC segments.

Compared to home improvement retailer Lowe's (LOW), which reported a 31% gross profit margin and 12% operating profit margin in 2024, Ferguson's B2B wholesale model and project-based services cater specifically to professional contractors. Lowe's excels in consumer reach and e-commerce scale, but Ferguson's emphasis on specialized support, technical expertise, and efficient jobsite logistics provides a distinct advantage for large-scale and complex projects. Ferguson's extensive branch network ensures local access and integrated services, which can translate into stronger pricing power and recurring revenue from long-term contracts.

Indirect competitors, such as online marketplaces like Amazon (AMZN), pose a threat through convenience and broad selection. However, Ferguson counters this by emphasizing its value-added services, deep product expertise, and the critical role of its knowledgeable associates in solving complex project requirements. The company's strategic investments in digital tools and omnichannel capabilities, exemplified by Ferguson Home, are designed to enhance customer experience and maintain its competitive edge against these evolving threats.

Technological Differentiation and Innovation: Powering Productivity

Ferguson's technological differentiation is not about proprietary manufacturing processes, but rather its sophisticated application of technology to enhance distribution efficiency, customer productivity, and project management. The company leverages a suite of digital tools and data analytics to streamline operations and provide superior value.

A core aspect of this is the optimization of its supply chain network, which includes automated picking and replenishment systems in its market distribution centers (MDCs). These systems improve efficiency and reduce manual handling, contributing to associate health and safety. While specific quantifiable metrics on efficiency gains from automation are not publicly detailed, the strategic intent is clear: to ensure same-day and next-day product availability, a critical requirement for customers that directly impacts project timelines and labor costs. This operational agility is a tangible benefit over smaller, less technologically advanced distributors.

Furthermore, Ferguson is actively integrating artificial intelligence (AI) into its operations. In its Waterworks business, AI is used to advise customers on preventative maintenance and leak detection. This offers a significant benefit by helping customers reduce operational costs, extend asset lifespans, and improve system reliability. While specific performance metrics for AI-driven advice are not disclosed, the strategic goal is to enhance customer service, strengthen relationships, and differentiate Ferguson as a solutions provider beyond mere product distribution. The company also acknowledges the emerging risks of AI, including cybersecurity vulnerabilities and the potential for biased outputs, and is implementing safeguards.

In the realm of customer engagement, Ferguson's digital commerce capabilities and system-to-system integrations provide multiple sales channels, from e-commerce to virtual design. The launch of "Ferguson Home" in February 2025 exemplifies this, unifying showroom and digital channels to offer a seamless, project-based experience for residential customers. This omnichannel approach, supported by dedicated outside sales and showroom consultants, aims to meet unique project needs with precision and care, particularly in the higher-end remodel market. This integrated platform enhances customer convenience and efficiency, directly contributing to customer loyalty and market share gains.

For large capital projects, Ferguson utilizes virtual design and fabrication services, which are critical for complex undertakings like data centers, biotechnology facilities, and water treatment plants. These services allow for pre-assembly and kitting, reducing on-site labor and project timelines. By engaging early in the design phase and leveraging digital models (BIM), Ferguson partners with owners, architects, and engineers to influence project challenges effectively. This technological integration translates into significant productivity gains for contractors, making Ferguson an indispensable partner and contributing to its strong growth in non-residential markets. The "so what" for investors is clear: these technological investments enhance Ferguson's competitive moat by increasing customer stickiness, driving operational efficiencies, and enabling the company to capture higher-value business segments, ultimately supporting durable gross and operating margins.

Financial Performance and Operational Resilience

Fiscal year 2025 proved to be a testament to Ferguson's operational resilience amidst a challenging market. Net sales increased by 3.8% to $30.76 billion, primarily driven by higher sales volume and incremental contributions from nine strategic acquisitions. This growth was achieved despite a 0.4% impact from one fewer sales day and persistent commodity-led deflation, particularly in the first half of the fiscal year. Adjusted operating profit for fiscal 2025 rose by 0.6% to $2.84 billion, yielding a 9.2% operating margin. This profit expansion, despite a 1.7% decline in reported operating profit due to $80 million in non-recurring restructuring expenses, underscores management's effective cost control and strategic pricing actions. Diluted earnings per share increased by 9.3% to $9.32, benefiting from higher net income and ongoing share repurchases.

Gross profit as a percentage of sales improved to 30.7% in fiscal 2025 from 30.5% in the prior year. This reflects "specific management actions to better capture the value provided to customers and the timing and extent of supplier price increases," partially offset by commodity deflation. While selling, general, and administrative (SGA) expenses as a percentage of sales increased slightly to 20.7%, this was primarily due to "higher performance based incentive compensation and the impact of cost inflation on labor, infrastructure and fleet," indicating investment in human capital and operational capacity.

The United States segment, accounting for 95% of net sales, saw a 3.8% increase in sales to $29.27 billion. Non-residential markets within the U.S. were a significant growth driver, expanding by 6.8% to $14.67 billion, propelled by large capital projects. Commercial revenue grew 17% in Q4 2025, CivilInfrastructure by 13%, and Industrial by 5%. Residential markets, while subdued overall, still managed a 0.9% increase in sales to $14.60 billion, largely due to Ferguson's outperformance in HVAC and higher-end remodel. The Canada segment also contributed positively, with net sales growing 3.7% to $1.49 billion, bolstered by acquisitions and price inflation.

Strategic Initiatives Driving Outperformance

Ferguson's growth in fiscal 2025 was a direct result of its multi-year strategic investments:

• HVAC Expansion: The "HVAC everywhere" strategy delivered an 8% revenue increase for the full fiscal year, with organic growth being the primary contributor. This initiative involves converting over 600 plumbing counters to dual-trade locations, targeting 650 by early 2026, to serve the growing segment of 65,000 dual-trade contractors. Geographic expansion into new markets and strategic acquisitions, such as Manufactured Duct & Supply Company and More Supply, further strengthen this footprint.
• Waterworks Diversification: Waterworks revenue grew 10% in fiscal 2025, driven by efforts to offer integrated solutions for aging national infrastructure. This includes expertise in water, wastewater, stormwater management, erosion control, treatment plant construction, and metering technology. Acquisitions like Templeton and Ritchie Environmental Solutions have bolstered capabilities in treatment plant design.
• Large Capital Projects: This segment was a standout, driving 7% total non-residential growth for the year. Ferguson's multi-customer group approach, combining Waterworks, Commercial Mechanical, Industrial PVF, and Fire Protection, creates a compelling solution for complex projects like data centers, biotechnology facilities, and large manufacturing operations. The company's early engagement with owners, engineers, and general contractors, coupled with value-added services like fabrication and virtual design, positions it as a trusted partner.
• Ferguson Home: Launched in February 2025, this unified brand integrates residential building and remodel with residential digital commerce. Accounting for approximately 19% of U.S. sales, it targets the higher-end project market, providing a seamless omnichannel experience.

Liquidity and Capital Allocation Discipline

Ferguson's financial strength is a cornerstone of its investment thesis. The company generated $1.9 billion in operating cash flow in fiscal 2025, an increase of $35 million year-over-year, and $1.65 billion in free cash flow, up $132 million. This robust cash generation supports its capital allocation priorities. Ferguson invested $301 million in acquisitions and $305 million in capital expenditures in fiscal 2025, funding strategic projects like new market distribution centers and technology upgrades.

The company maintains a strong balance sheet with a net debt-to-EBITDA ratio of 1.1x as of July 31, 2025, well within its target range of 1x to 2x. It also boasts $2 billion in available liquidity from undrawn debt facilities. Ferguson is committed to returning surplus capital to shareholders, having increased its quarterly dividend by 5% to $0.83 per share. In fiscal 2025, the company returned $948 million through share repurchases, reducing its share count by approximately 5 million, with $1 billion remaining under the current program.

A notable operational change is the shift in fiscal year-end from July 31st to December 31st, effective January 1, 2026. This move aims to align year-end activities with the company's slowest season, allowing associates to focus on customers during peak periods.

Outlook and Key Risks

For calendar year 2025, Ferguson anticipates mid-single-digit revenue growth and an operating margin range of 9.2% to 9.6%, representing an improvement of 10 to 50 basis points over the prior year. Interest expense is projected to be between $180 million and $200 million, with an effective tax rate of approximately 26%. Capital expenditures are estimated between $300 million and $350 million. Management expects a modest level of overall inflation to play through the calendar year, with finished goods pricing inflecting positively and commodity deflation easing, although new residential construction and RMI markets are expected to remain subdued in the latter half of the calendar year. The $100 million in annualized cost savings from recent streamlining actions are expected to contribute to operating leverage.

Despite this positive outlook, several risks warrant investor attention. The company's performance remains sensitive to general economic conditions, particularly in the U.S. where 95% of its sales originate. Fluctuations in commodity prices, especially for plastic, copper, and steel, can impact profit margins if price changes cannot be passed on to customers. Supply chain disruptions, labor shortages (particularly skilled trade professionals), and the evolving cybersecurity threat landscape, including risks from generative AI, could also affect operations and financial results. Furthermore, the expansion of private label products introduces increased regulatory, product liability, and reputational risks.

Conclusion

Ferguson Enterprises Inc. presents a compelling investment thesis grounded in its strategic focus on North America's specialized construction distribution market. The company's history of adaptation, coupled with its robust business model and multi-customer group approach, has enabled consistent market outperformance even in challenging environments. Ferguson's technological integration, from automated distribution centers to AI-driven customer solutions and virtual design services, provides a distinct competitive edge, enhancing productivity for its professional customers and reinforcing its market leadership.

While macroeconomic headwinds, particularly in residential construction and commodity markets, persist, Ferguson's proactive management of costs, strategic pricing, and disciplined capital allocation underpin its resilient financial performance. The company's strong balance sheet and commitment to shareholder returns further enhance its appeal. As Ferguson capitalizes on multi-year tailwinds in infrastructure spending, HVAC expansion, and large capital projects like data centers, its ability to deliver scale locally and provide exceptional value positions it for sustained growth and profitability. Investors should monitor the continued execution of its growth initiatives and the trajectory of market pricing, confident in Ferguson's strategic foundation and operational agility.