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Why the Reliance Worldwide share price crashed 8% to a 52 week low on Friday

One of the worst performers on the market on Friday was the Reliance Worldwide Corporation Ltd (ASX: RWC) share price.

The plumbing parts company’s shares fell almost 8% to a new 52-week low of $3.08.

Why did Reliance Worldwide shares crash lower?

Although it has yet to be confirmed by the company, investors hit the sell button in a panic on Friday amid speculation that Ferguson PLC had withdrawn its products from sale.

This is a reasonably big deal given that Ferguson is the world’s leading specialist distributor of plumbing and heating products.

According to a note out of Goldman Sachs, its channel checks have confirmed that Ferguson will no longer stock the company’s SharkBite push-to-connect (PTC) fittings. This is apparently part of Ferguson’s ongoing strategy to increase its own label products.

What is the impact of this move?

Goldman estimates that this could impact its EBITDA by up to 2% in FY 2020.

This is because it believes Ferguson represents ~6% of its North American sales or ~3% of group sales.

And while investors may be concerned that other distributors or retailers may be tempted to follow the lead of Ferguson, it notes that own-brand PTC products have struggled to gain traction previously.

Goldman said: “This is not the first time that Ferguson has destocked a PTC brand with Tectite previously removed from shelves due to underperformance vs. SharkBite despite both brands having similar offerings. Furthermore, Lowes stocked a white label PTC fitting under the Blue Hawk brand before introducing SharkBite. Due to the nature of behind-the-wall plumbing, quality and reputation are key to gaining product acceptance, and we believe this is a key reason why alternative PTC fittings have yet to gain meaningful market share vs. SharkBite.”

In light of this, Goldman appears to see no reason for alarm and has held firm with its buy rating and $4.60 price target. This price target implies material upside over the next 12 months of approximately 49%.

I think this could make it well worth considering an investment in its shares whilst they are trading at such low levels.

Incidentally, Goldman has a buy rating on the shares of Star Entertainment Group Ltd (ASX: SGR) and Telstra Corporation Ltd (ASX: TLS) also.

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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 Telstra 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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