Wolseley errs on the side of caution; The Investment Column

Wolseley has a track record most investors would give their eye teeth for. Richard Ireland, the chairman, can rightly boast that the builders' merchant has consistently delivered compound earnings growth of 20 per cent for as long as anyone cares to remember.

Last year's slight profits dip now looks like a mere hiccup and the latest half-year figures make encouraging reading - even if Wolseley continued its tradition of playing down the prospects.

Mr Ireland's words of caution are worth repeating. The upturn in the UK housing market is described as fragile and "unlikely to deliver much benefit to our UK distribution activities until later this year". There is as yet no sign of a "consistent pattern of improvement across all regions in our lightside and heavyside activities".

Mr Ireland is as pessimistic about the immediate future for in the UK. "Consumers may be reluctant to increase expenditure to any great extent until after the general election," he suggests.

That is to say nothing of the poor state of the French and Austrian economies as they prepare for European economic and monetary union. All told, the building distribution division in Europe, including the UK, saw trading profits decline by pounds 1.6m to pounds 47.6m.

As for building distribution in the US - Wolseley's largest market - first-half trading profits advanced to pounds 56.6m, a 22 per cent rise, but again there was a caveat, this time concerning the strength of sterling. This wiped pounds 4.2m off Wolseley's bottom line and the hit will be even bigger in the second half if exchange rates stay at current levels.

None of this should give cause for undue concern. The healthy state of the balance sheet - gearing is just 13 per cent despite pounds 71m being spent on acquisitions - means the roll-out of the Plumb Center and Pipeline Center branches should continue apace. Another 64 were added in Europe in the first half, bringing the total to 924, while the US now boasts 508, up from 474.

But in a low-inflation environment where price increases are becoming a distant memory, acquisitions are increasingly necessary to drive earnings forward. Without them, analysts reckon Wolseley would be sitting on an embarrassingly big pounds 150m cash pile by the end of 1999, even assuming capital expenditure continued to outpace depreciation by a comfortable 30 per cent.

In terms of branch coverage, Germany remains a big gap on the map, but buying into Europe's largest market will be expensive and investors may be reluctant to take more Wolseley paper. The other concern is in the US, especially in the lumber business which is exposed to the new-build market.

House broker Albert E Sharp looks for pre-tax profits of pounds 274m, rising to pounds 307m in 1998. That puts the shares, down 1.5p to 495p, on a prospective p/e of 15 falling to less than 14. Hold.