James Moore: Keep your appetite for both Domino's and Cranswick
Investment View: The winds are in its favour and there is reason to believe it can still add some crackling to a portfolio
Cranswick is one of those mid-sized companies that it’s worth keeping an eye on. The sausage maker has been bringing home the bacon for quite a while now, but the winds are very much in its favour and there is reason to believe that it can still add some crackling to a portfolio.
The company yesterday issued its trading update for its fourth financial quarter – the three months to 31 March. This is usually a fairly quiet one, and pig prices typically fall after the Christmas rush.
However, underlying sales were nonetheless 13 per cent higher than in the previous year, adjusting for the fact that there was an extra trading week last year. For the year to 31 March they rose by 5 per cent, 7 per cent including the acquisition of Kingston Foods, which was taken over on 29 June.
In other words, sales growth is picking up. Of course the shares have been hot commodities on the markets since, well, a certain food scandal reared its ugly head. To be fair, they had started to pick up momentum before horse DNA was found in various processed meat products in the UK and Ireland. But they have taken a real leap since the affair hit the headlines and, at 1,014p, now trade at six-year highs.
The company is cautious about reading too much into the scandal’s impact on the numbers. But the consequences of it do favour a business operating towards the premium end of the market and sourcing its product from Britain.
And there are other drivers for the long-term performance of Cranswick to bear in mind as well. The animal welfare standards being adopted across Europe (not before time) should level the playing field given that UK companies already operate under fairly tough rules and have been doing so for some time.
The business’ export prospects are a potential gold mine: Cranswick has approval from the US Agriculture Department to export primarily ribs, which the country has an insatiable appetite for and can’t fulfil on its own. The bits of a porker we turn our noses up at in this country (offal for example) they’re more than happy to consume in China. And China is the world’s biggest market for pork, by a distance. It is a market that should grow as more and more people can afford to add meat to their diets.
Any company operating in the food industry needs to have a care. One only needs to consider the impact of the horsemeat scandal to see that.
Nevertheless, Cranswick looks well placed and the shares still aren’t overly expensive given the company’s potential at a shade over 12 times current forecasts for the current financial year (which finishes at the end of March 2013) with an acceptable prospective yield of just over 3 per cent.
The share price is probably up with events, so hold for now. But if there’s any profit taking in the next few weeks I would buy on weakness.
Pizza company Domino’s also updated yesterday, and there was a lot to like about its trading statement.
Despite the snow, its UK sales grew by 6.6 per cent at mature stores (excluding new openings), although the comparable period this time last year was weak because the weather was unseasonably warm however hard that seems to believe during the current chill.
Ireland was resilient and growth continues apace in Germany with work being done to pep things up in Switzerland. Domino’s pizzas are not always the cheapest (although price promotions boosted the figures this year) and they might not always be the best. But the company is consistent, reliable, and convenient – with a huge proportion of sales now handled over the internet.
A black mark against the operation, however, is its low grade from Pirc when it comes to what the corporate governance consultancy sees as an overly generous bonus scheme. It is sharply critical of recent changes to the company’s “long-term incentive scheme”.
As a general point, when one considers executive bonuses, these share-based schemes are often overlooked, not least because many companies make them deliberately difficult to put a value on to obscure how much they are actually worth. That needs to change.
The shares rose 6 per cent to 607p yesterday, and at nearly 24 times this year’s forecast earnings, falling to 20 times next year, with a forecast yield of 2.7 per cent (rising to 3.2 per cent) they are by no means cheap. But if this is how the company trades during a tough economy, just think about how it can do during a good one. Should we lay off the management then? No, because they ought to set an example, and Domino’s owes a debt to its staff too. But keep holding the shares, and vote against the remuneration report at next year’s annual meeting.
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