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The Reliance share price torn between its profit results and outlook

The Reliance Worldwide Corporation Ltd (ASX: RWC) share price will be on watch this morning as the general lack of bad news in its full year results runs head-on with a profit downgrade.

The thing working in Reliance Worldwide’s favour is its sagging share price. One won’t usually see this as an advantage but given that the RWC share price is trading at the bottom of its 52-week trading range as it fell 2.4% yesterday to $3.30, some level of bad news is already factored into the stock.

To be sure, there’s room for the stock to play catch-up if it can convince investors that things are back on the right path given that the stock has slumped over 40% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 3%.

This makes the stock one of the worst performers in the building materials sector but that bad boy reputation could soon be passed on to the Boral Limited (ASX: BLD) share price, which is down around 39% over the same period.

The small numbers more exciting than the big ones

Reliance Worldwide reported a 102% jump in net profit to a record $133 million for FY19 as revenue increased 43% to $1.1 billion because of its acquisition of John Guest.

The market would be expecting the big result but what is pleasing in my view is that revenue excluding the contribution from the takeover was 5%.

Further, adjusted earnings per share jumped by 23% to 19.4 cents a share, a tat ahead of the 19.2 cents that consensus forecasts were predicting. It’s a small beat, but like I said, there isn’t much good news in the stock and investors might be willing to overlook its margin squeeze from rising costs (like copper).

I was worried that the US-exposed business would turn in a shocker like Boral did as Reliance Worldwide had been impacted by unfavourable weather in the US during their winter. The season wasn’t cold enough and that meant fewer burst water pipes!

Throw in the patchy building activities data and signs of an economic/construction slowdown across its key markets – the US, the UK and Australia – and you can see why investors weren’t keen to back its sliding share price.

The big uplift in earnings prompted management to up its final dividend to 5 cents a share, taking its full year payout to 9 cents compared to FY18’s 6.5 cents a share. Nothing for income investors to write home about, but again, every little piece of good news is a plus for this dog.

The black-lining to an otherwise reasonable result

However, what could cause this good news story to turn sour is the group’s outlook. The volatile economic environment and the potential impact of a hard Brexit could take its toll on FY20 earnings with management forecasting net profit of $150 million to $165 million for the current financial year.

This means net profit could be flat or it could jump 9%. The market may not react well to this as consensus were tipping around a 14% increase in adjusted EPS for FY20.

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Brendon Lau owns shares of Boral Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide 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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