Ferguson (FERG) Q1 2026: Non-Residential Revenue Jumps 12%, Offsetting Housing Drag

2025-12-09 | By EarningsIQ Research

Ferguson’s Q1 2026 results highlight a pronounced shift toward non-residential growth, with large capital projects and diversified customer groups driving share gains even as residential end markets remain pressured. Margin expansion and disciplined cost management reinforce the company’s resilience, while management signals continued investment in digital, talent, and M&A as key levers for medium-term outperformance. Guidance reflects confidence in structural tailwinds, but investors should monitor exposure to cyclical softness and the evolving pricing environment as the company enters 2026.

Summary

• Non-Residential Outperformance: Commercial and WaterWorks growth offset persistent residential softness.
• Margin Discipline: Cost controls and mix shift drove operating margin expansion despite market headwinds.
• Strategic Capital Deployment: Investments in digital, talent, and bolt-on M&A remain central to the playbook.

Performance Analysis

Ferguson delivered 5% total sales growth in Q1 2026, with organic expansion of 4% and a 1% boost from acquisitions. Performance was sharply bifurcated: non-residential revenue grew 12%, benefiting from large capital project activity and robust bidding pipelines in commercial mechanical and WaterWorks, while residential revenue declined 1% as new housing starts and RMI (repair, maintenance, improvement) work remained subdued. Segment analysis reveals that the U.S. business, which accounts for the overwhelming majority of revenue, posted 5.3% growth and 10.4% operating margin, while Canada remained challenged with only 2.2% top-line growth and lower profitability.

Gross margin expanded 60 basis points to 30.7%, aided by pricing discipline and favorable mix, while operating profit rose 14%, outpacing sales. Ferguson maintained tight cost discipline, with operating costs growing slower than revenue, yielding 20 basis points of operating leverage. Free cash flow improved to $325 million, supporting continued dividend increases and $208 million in share repurchases. Balance sheet strength (1.1x net debt/EBITDA) enables both organic investment and opportunistic M&A.

• Segment Divergence: Commercial mechanical (+21%) and WaterWorks (+14%) led growth, while HVAC (-6%) and residential plumbing (-4%) lagged.
• Pricing Dynamics: Overall inflation was 3%, with finished goods pricing up and commodity baskets mixed (PVC deflation, steel mild inflation, copper strong inflation).
• Operating Margin Expansion: 80 basis points of improvement YoY, driven by mix and cost controls.

Ferguson’s multi-customer group strategy and value-added services allowed it to take share in a fragmented market, but headwinds in residential and HVAC remain a watchpoint as the company pivots toward 2026.

Executive Commentary

Strategic Positioning

1. Large Capital Projects as a Growth Engine

Ferguson’s exposure to large capital projects (mid- to high-single digits of total revenue), with data centers comprising over half, is a critical offset to residential drag. The company’s multi-customer group approach—integrating WaterWorks, commercial mechanical, and fire/fabrication— enables broad share capture and deeper project engagement. Management expects continued pipeline growth, though acknowledges potential revenue lumpiness due to long project gestation periods.

2. Multi-Channel and Value-Added Differentiation

By leveraging digital tools, showrooms, and value-added services (e.g., fabrication, virtual design, automation), Ferguson is deepening customer relationships and supporting complex project needs. The Ferguson Home platform, which unifies digital and showroom experiences, grew in a tough market, demonstrating the stickiness of its higher-end offering.

3. Disciplined Capital Allocation and M&A

Ferguson continues to pursue bolt-on M&A (notably the Moore Supply acquisition in Chicago HVAC) to consolidate its fragmented markets and expand product capability. The company’s capital priorities—reinvesting in organic growth, maintaining a strong balance sheet, and returning excess capital—were evident in increased dividends and ongoing buybacks. Management highlighted a robust acquisition pipeline and flexibility for further deals.

4. Talent and Operational Investment

Investment in the trainee program (adding 250-300 associates this year), HVAC counter buildout (650 conversions), and technology upgrades underpin Ferguson’s long-term growth ambitions. These initiatives are designed to ensure expertise, expand dual-trade contractor reach, and support outperformance in both good and bad markets.

5. Managing Through Cyclical and Commodity Swings

Margin management amid pricing and commodity volatility remains a core competency. While finished goods pricing is expected to normalize, management is cautious about outsized gross margin gains repeating as supplier price increases moderate. Inventory levels are considered appropriate, with no significant changes expected as the company transitions into 2026.

Key Considerations

Ferguson’s Q1 2026 results reflect a company actively managing through mixed end-market signals, using scale, diversification, and capital discipline to deliver above-market performance. Investors should weigh the following:

Key Considerations:

• Non-Residential Momentum: Large project activity and commercial mechanical strength are offsetting residential and HVAC softness, but the pipeline’s lumpiness could introduce volatility.
• Residential Headwinds: Weak housing starts and RMI continue to weigh on half of U.S. revenue, with no near-term recovery signaled.
• Pricing and Margin Normalization: Management expects a more normalized pricing environment in 2026, with less benefit from supplier price timing, suggesting gross margin gains may moderate.
• Capital Flexibility: Strong balance sheet and cash flow enable ongoing investment, M&A, and capital returns, supporting strategic agility.
• Execution on Talent and Digital: Continued investment in trainees, digital tools, and counter expansion is critical for sustaining share gains and operational leverage.

Risks

Ferguson faces cyclical risk from persistent residential weakness and HVAC market pressure, as well as potential lumpiness in large project revenues. Commodity swings and supplier pricing behavior could impact gross margins, particularly as the company laps periods of deflation and outsized gains. Execution risk remains around integrating acquisitions, scaling digital investments, and maintaining SG&A discipline in a choppy demand environment.

Forward Outlook

For the next quarter, Ferguson signaled:

• Growth Moderation: Calendar Q4 growth tracking at approximately 3%, consistent with expectations for increased pressure in new residential and HVAC.
• Margin Stability: Gross margin expected to remain in the 30% to 31% range.

For full-year 2025, management raised margin guidance:

• Revenue growth expected at 5%.
• Operating margin targeted at 9.4% to 9.6%, up from prior 9.2% to 9.6%.

Management emphasized medium-term confidence in both residential and non-residential markets, highlighting structural tailwinds and continued market outperformance. Guidance for 2026 will be provided in February, with no material change expected in early-year market conditions.

Takeaways

Ferguson’s strategic pivot toward non-residential and large capital projects, combined with disciplined cost management and capital allocation, is enabling the company to outperform in a mixed macro environment.

• Structural Shifts: Non-residential outperformance and project pipeline growth are mitigating cyclical residential softness, but introduce revenue timing risk.
• Margin and Capital Discipline: Tight SG&A management, normalized pricing, and strong cash flow support ongoing investment and returns.
• Execution Watchpoints: Investors should monitor HVAC recovery, project lumpiness, and integration of bolt-on acquisitions as Ferguson enters a pivotal year.

Conclusion

Ferguson’s Q1 2026 results underscore the company’s ability to adapt and outperform, even as end-market dynamics diverge. Sustained margin expansion, capital flexibility, and a multi-pronged growth strategy position the business well, though cyclical risks and margin normalization warrant close attention as 2026 unfolds.

Industry Read-Through

Ferguson’s results highlight a broader construction supply sector trend: large project and non-residential demand are currently the main engines of growth, while residential and HVAC end markets remain under pressure. Competitors with diversified end-market exposure and value-added services are better positioned to weather cyclical downturns, but must also manage project-driven revenue lumpiness and margin normalization as pricing stabilizes. Digital investment, talent development, and M&A discipline are likely to remain key differentiators across the sector as the industry navigates persistent macro uncertainty and evolving customer demands.

FERG Industrials Building Products Non-Residential Capital Projects HVAC Digital Acquisitions