After rising more than 50% in less than two years, shares of specialty chemicals dynamo Croda (LSE: CRDA) have pulled back and taken a breather since April. The concern is that growth is slowing and might not return as revenue growth has hovered around 3% the last two years.
Determining Croda’s future growth trajectory isn’t a simple matter, because its expansion depends on innovation and Croda is tight-lipped about the products in development for customers. This is understandable as Croda’s specialty is developing the ingredients that allow Unilever, Estee Lauder and others the ability to claim on the label that their products make our hair and skin healthier, smoother, or stronger.
Despite the difficulty in gathering specifics, I believe there’s enough evidence we’re looking at a lull in Croda’s sales growth and not a permanent slowdown. Here are four reasons that support this thinking:
Higher-quality results
While Croda’s sales growth has slowed, the quality of those sales has improved and Croda’s margins have expanded accordingly. This has allowed operating profit growth to significantly outpace revenues as Croda improved the mix of products it sells and held operating costs stable. So while investors have been disappointed by the company’s sales figures, there has been little to complain about on the bottom line and Croda has reinvested much of the profit in the business.
Crop care will come back
Most of Croda’s Consumer Care sales are to the beauty and personal care industries, but crop care is about half of its remaining consumer care sales. A significant portion of these sales is for fungicides and demand has been lacklustre because of drought conditions in many parts of the world entering this year.
In its half-year results, Croda noted there are signs the trend is beginning to reverse — and logically that makes sense, as the US has seen its drought conditions replaced with ample rain. Plus anything that improves yield at a reasonable cost is well positioned, though competitive threats from BASF and others must always be considered.
Europe showing signs of strength
Nearly 40% of Croda’s sales are in Europe and most of those are outside of the UK. While many of these sales are to personal care customers that then sell their products globally, another sizeable portion are for sealants and lubricants for new vehicles. This week, Europe posted better-than-expected GDP growth, and there is a buzz in economic circles that Europe may be turning the corner. If this is the case, it is a clear positive for Croda sales potential.
Investing for growth
In the past year, the company has made three small acquisitions that should see a boost from additional new product development and the benefit of Croda’s global sales force and customer relationships. Croda also isn’t shy about investing to expand into new regions or products where it sees opportunity.
A growth story again?
At 19-times earnings Croda’s shares fetch multiples similar to those of its customers in the cosmetic and personal care industries. That’s not entirely unreasonable, because the predictability of their sales flows through to Croda. Still, that’s not a bargain multiple so a healthy return on the shares likely depends on growth ticking up. I’ve laid out my reasons why I believe it will. What’s your take?
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> Nathan does not own shares of any company mentioned in this article. The Motley Fool has recommended shares in Unilever.
