Reece Has Recovered From the Low — But at These Levels, It's No Longer a Bargain

I have long maintained that the plumbing distribution space offers structural tailwinds — aging housing stock, population growth, and an underbuild of new homes should support demand for decades. Reece Limited is the largest name in that space in Australia and has spent the last five years betting aggressively on the United States to double its growth runway. The problem is that the stock has recovered so far from its lows that it no longer offers the margin of safety required to own it, despite management describing 2026 as one of the most challenging years in the company's history.

Let me start with the cash-flow picture. For the half-year ended December 2025, Reece reported sales revenue up 6 percent to $4.65 billion, but that growth came almost entirely from adding 23 new branches. Like-for-like sales were flat. More telling than the headline revenue is what happened to earnings. EBITDA — earnings before interest, taxes, depreciation, and amortization, a rough proxy for cash earnings — fell 6 percent to $448 million. EBIT dropped 14 percent to $262 million. The return on invested capital, the measure that tells you whether capital is being deployed productively, fell 222 basis points to 10.8 percent. That is a steep decline for a business that has historically traded at a premium multiple because of its earnings consistency.

From an operations perspective, both halves of the business are struggling. The Australia and New Zealand segment saw revenue rise 4 percent to $2.1 billion, but EBITDA declined 4 percent to $261 million and EBIT margins contracted 106 basis points to 8.7 percent. Management attributed this to elevated costs in labor, IT, and property, alongside soft housing demand that's geographically mixed across states. The US segment is in worse shape. Revenue grew 6 percent to $1.7 billion, entirely from new-store adds, while like-for-like sales declined. EBIT fell 26 percent to $55 million, with margins down 143 basis points. The US housing market remains frozen — over half of outstanding mortgages carry rates below 4 percent, creating a lock-in effect that suppresses moving and new construction. Reece is also losing market share in waterworks, where a former Fortline management team has launched a competing supplier.

Having said that, the real concern for a value investor is not the cyclical softness alone — it's the capital allocation decisions being made against it. During the half, Reece deployed $401 million of capital to buy back its own shares. That is a massive outlay for a business generating $199 million in operating cash inflows for the half-year. The net result was that net debt ballooned from approximately $590 million at the end of fiscal 2025 to $1 billion at the end of the reporting period. The company is borrowing to buy back shares while its earnings are declining and its return on capital is deteriorating. That is the opposite of how you manage a balance sheet in a downturn.

Management's guidance for the full year tells you everything you need to know about the near-term outlook. They expect group EBIT of $520 million to $540 million for FY26, which is essentially flat to slightly below FY25's $548 million. The interim dividend was 5.44 cents per share, and the full-year dividend in FY25 fell 29 percent to 18.36 cents from the prior year. The Wilson family, which retains a 67 percent ownership stake, is absorbing most of the income pain — but public shareholders are left with a dividend yield that has compressed to roughly 1 percent as the share price has bounced from its lows.

Now let's talk about valuation, because this is where the story turns from a hold to a pass. Reece shares are trading around $16.50, up roughly 65 percent from the 52-week low of $10 and well inside the upper end of the yearly range. The stock carries a trailing price-to-earnings multiple of roughly 39 times. A 39 times multiple on flat-to-declining earnings, with ROIC in the low double digits and net debt up nearly 70 percent, is not the hallmark of a deeply undervalued business. The EV-to-operating-cash-flow ratio sits at 22.7 times, near its 10-year median of 23.7 times, which means the stock is not trading at any historical discount despite the earnings deterioration. The market appears to have largely repriced the near-term pain and is now bidding up the shares on the assumption that the housing cycle must turn.

The market is not wrong that the long-term tailwinds remain intact. Housing underbuild, demographic growth, and an aging stock in both ANZ and the US will support plumbing demand over time. Reece's 900-branch network gives it scale advantages that smaller competitors cannot replicate. And the Wilson family's deep ownership alignment means management incentives are genuinely tied to long-term outcomes rather than short-term optics. But long-term tailwinds do not justify paying a premium multiple when the business is in the middle of its worst earnings period in years. The patient hold thesis from a year ago — when the stock was at $10 and trading on a markedly lower multiple — has been invalidated by the share price recovery.

Even if the housing cycle turns faster than management expects, the current price already reflects a recovery that hasn't happened. The US competitive situation is structural, not cyclical, and will take years to address. The margin expansion that would justify a premium multiple is still out of reach, with management acknowledging that the double-digit EBIT margins of prior years are likely behind them as competition intensifies.

While it's true that Reece is a high-quality business in a structurally attractive market, shares at these levels do not offer a margin of safety. There are more compelling opportunities in the Australian market where cash-flow visibility, balance-sheet quality, and valuation discounts align rather than working at cross-purposes. At a 39 times multiple on declining earnings, Reece is not the bargain it was a year ago. I would rate this a Hold.