The expression “as dull as dishwater” springs to mind when describing this stock, but appearances can be deceptive. The company operates a simple business model, which has delivered earnings-per-share growth of an average of 9% a year over the past decade.
Turkey of the week: Bunzl (BNZL, 677p), tipped as a BUY by Panmure Gordon and the Daily Mail
Bunzl distributes thousands of different types of disposable products – such as packaging, paper cups, utensils, toilet rolls and detergents – to the retail, catering and cleaning trades. It is one of the largest suppliers of carrier bags to the likes of supermarket groups Tesco and Asda. Bunzl’s competitive advantage is driven by its economies of scale, its bargaining power with smaller suppliers and its solid execution.
But there are a few dark clouds on the horizon that could derail this admirable track record. Firstly, 55% of profits are generated in North America and, if the dollar weakens, profits will be hit. Secondly, higher energy prices are now starting to feed through into input costs – so margins could also be squeezed, unless selling prices can be raised accordingly, which is proving increasingly difficult as competitive pressures intensify, especially in Europe.
For example, when last week’s interim results were announced, chief executive Michael Roney admitted that Bunzl’s hotel, restaurant and catering arm in the UK and Ireland had been suffering from “challenging conditions”. If similar pressures spread across the pond into the much larger American market, this could severely damage profit margins.
Finally, as you’ve probably seen in the media, many supermarkets have just launched high-profile campaigns to reduce the level of packaging that they use in their products. Last month, Tesco announced a new initiative to reduce its consumption of carrier bags by 25% in two years. As a one-off gesture, this wouldn’t impact too adversely on Bunzl. However, Tesco’s move could be a precursor to a more concerted effort by supermarkets and other retailers to recycle more disposable waste. Should that trend continue, and I expect that it will, then it will be difficult for Bunzl to avoid a gradual contraction of its core markets.
With this in mind, at 677p the stock is currently overvalued, especially for
price-conscious investors like myself. The shares trade on 2006 and 2007 p/e multiples of 16 and 15 respectively, which is expensive for an industry with low barriers to entry (albeit one that offers defensive qualities). I would rate the shares on a 13 times forward p/e multiple, which would generate a fair value of around 535p.
Recommendation: TAKE PROFITS at 677p.
Paul Hill’s personal portfolio has gone up by 483% over the last five years.
To find out more about his own specialist share-tipping service, ‘Precision Guided Investments’, click on the link below