In late July shares in Cranswick were toasted after the fresh pork, bacon and sausage maker warned that rising input costs would hit profits. Pig meat prices – after sliding to historically low levels in 2010 – have risen by 15% since March as feedstock (mostly in the form of wheat and soya-based grains) has rocketed in price.
Cranswick has sensibly chosen not to raise prices all in one go. This would have been commercial suicide, and risked putting hard-pressed families off its produce. Instead, the board decided to phase in price rises, initially absorbing 40% of the added costs themselves. Consequently, first-half operating profits are expected to be down on last year and “there is little prospect of any improvement” for the second half.
The good news, though, is that since then pork prices have dropped by around 5% to 145p a kg, which will help margins. For thrifty consumers who want to enjoy red meat, pork still represents excellent value compared to beef and lamb.
Cranswick ( LSE: CWK )
So despite the poor backdrop, relatively speaking Cranswick’s products are still selling well. Like-for-like revenues rose an impressive 5% in the three months to June. Of this total, 2% came from inflation, with the rest generated by healthy volume gains. Remember that this is in stark contrast to the wider food sector, where volumes are flat-lining. According to figures from the Office for National Statistics, in August food volumes fell 0.8% year-on-year.
Better still, Cranswick is diversifying away from supermarkets, where the top five grocers control 80% of the market. Over the past few years the company has launched higher-margin ranges, such as gourmet sausages, premium cooked meats and charcuterie, along with developing the Jamie Oliver and Weight-Watchers brands. Moreover, in May the company gained approval from the American Department of Agriculture to export its products to the US, opening up a potentially gigantic market.
Next year’s outlook is positive too. As long as the summer isn’t a complete wash out, sales should climb during the London Olympics and the European Football Championships as families fire up the barbecue and settle down to cheer on their favourite teams.
The City expects 2011 turnover and underlying EPS of £786m and 63.2p respectively, rising to £824m and 71.6p in 2012. That means the shares trade on p/e ratios for this year and next of less than ten. The dividend yield is a healthy 4.5%. I value the group on a ten-times EBITA multiple, which, after adjusting for £55m in net debt, delivers a fair value of about £7.50 a share. The next trading statement is scheduled for 6 October. Joint house broker Investec has a target price of 730p.
Rating: BUY at 608p (market capitalisation £290m)