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Why the Reliance Worldwide share price crashed 26% lower today

It has been a disappointing start to the week for the Reliance Worldwide Corporation Ltd (ASX: RWC) share price.

In morning trade the plumbing parts company’s shares are down a whopping 26% to $3.40.

Why is the Reliance Worldwide share price sinking lower?

This morning Reliance Worldwide released a trading update and revised its guidance for FY 2019. As you might have guessed from the share price reaction, it wasn’t a positive revision.

According to the release, the company’s operating segments have been affected by market‐specific factors which are negatively impacting their performance and results.

This has led to management downgrading its full year EBITDA guidance from between $280 million and $290 million to between $260 million and $270 million.

What happened?

Whilst the company’s Americas business continues to achieve good underlying growth, two issues have restrained net sales in the second half of FY 2019.

One is the lack of a modest freeze event in the region. A modest freeze event is considered to be the average level occurrence of winter storms over a sustained period across the USA, causing cracked or broken pipes.

The company will usually benefit more from freeze events occurring in the southern parts of the USA than in the north‐east or mid‐west. This is because water pipes are generally not as well insulated in the south, which means a freeze event can cause these pipes to break.

Management estimates that the lack of a modest freeze event has reduced net sales by the order of $12 million to $15 million in FY 2019.

In addition to this, a number of its channel partners have pursued strategies in the second half of the financial year to actively reduce inventory on hand. As a result, net sales in this half are lower than expected, particularly in the Retail channel.

Management believes this is a timing issue due to these inventory strategies rather than a fundamental demand issue.

In the EMEA segment the company’s John Guest business is performing to expectations, but its core Reliance Worldwide businesses in the UK and Spain have not met expectation. This is largely due to a decision by management to exit certain product lines previously sold.

And finally, the APAC segment has also fallen short of expectations as a result of a sharper than forecast decline in new home construction in Australia.

Despite this disappointing performance, management continues to be pleased with how the business is positioned, its current trajectory, and the underlying performance across our core products and geographies.

Should you invest?

Whist this was a dismal update, when the dust settles I think it could be worth picking up shares on the cheap if you’re prepared to make a long-term investment.

Alternatively, you could look at fellow plumbing parts company Reece Ltd (ASX: REH) or Bunnings owner Wesfarmers Ltd (ASX: WES).

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended Reliance Worldwide Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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