LONDON: Stock brokers are taking a cautious view of prospects for the merchant sector. JP Morgan Cazenove produced a note on the prospects for UK builders' merchants describing the 2012 outlook as challenging.
The broker has upgraded heating and plumbing distributor Wolseley to 'overweight' from neutral as the financial heavyweight
"The UK builders' merchants are characterised by high operational gearing and exposure to markets that have yet to see any real meaningful recovery post 2009. Into 2012, we expect UK and European markets to become tougher, with weak consumer spending compounding government austerity measures and slow commercial growth. US markets however, appear to be showing the first signs of recovery," JP Morgan Cazenove said.
On Wolseley, it said: " While we believe the relative strength of US markets is already relatively well appreciated, we see the potential for on-going positive earnings surprise, driven by the extent of a 2012 recovery and the group's ability to leverage its market-leading position and new position of strength.
JP Morgan Cazenove remained 'neutral' on Travis Perkins and also kept its 'neutral' stance on construction firm SIG where it said it saw the potential for stagnant markets to provide no significant earnings growth on a two-year view.
CRH was among the sharpest fallers as the FTSE 100 retreated for a second straight yesterday. Shares in the aggregates maker dropped 3.3% to £12.42 after peer Texas Industries said an improving US economy had yet to translate into increased construction activity. The Americas provide about half of CRH's sales.
The uncertain earnings outlook meant valuations for CRH and across the building materials sector remained "unjustifiably high", Credit Suisse said.
Credit Suisse recommended a switch to Wolseley, the plumbers' merchant. Its shares rose 0.7% to £21.41, also helped by an upgrade to "overweight" from J P Morgan Cazenove.