There’s good reason why many of Warren Buffett’s favourite holdings are big, boring businesses that thwart competitors with high moats to entry. Evidently other investors have taken this philosophy to heart when it comes to Total Produce (LSE: TOT), one of the world’s largest providers of fresh fruit and veg, whose shares are up over 300% over the past five years.
Total’s global network of farms allow it to grow the wide variety of produce that we expect to be in our grocery baskets year round, seasons be damned. That gives it a huge moat to entry for competitors who would need large amounts of capital as well as local know-how to grow bananas in Belize, blueberries in Australia or avocados in Kenya and somehow turn a profit after shipping them across Europe.
The wrinkle is that margins for grocery stores aren’t exactly astronomical, so imagine how low they are for the suppliers of commodities like fresh produce.
Have a number in your head? Now halve it.
Interim results released this week showed operating margins of a mere 1.5% over the past six months.
Of course, the company can still boost profits by moving the top line. And that’s what Total has done through organic growth and acquisitions. Revenue was up a full 10.4% year-on-year to €1.9bn. The mover and shaker behind this rapid growth was its international markets such as the US and India where sales rose 65.4%.
Befitting its staid industry, international expansion has been cautious and set up to avoid major pitfalls. A key part of this is a conservative approach towards leverage that led to net debt of only €95.7m at the end of June, which is only 1.1 times annualised EBITDA.
With relatively low debt, a high moat to entry for competitors and growing dividend, Total is one to watch for cautious investors.
Down but not out
Unfortunately, these are all characteristics that pubco Punch Taverns (LSE: PUB) can’t boast. That’s because while all pub chains have been affected to some degree by the end of the beer-tie and falling foot traffic, Punch Taverns has done enough on its own to dig itself into a very deep hole over the past few years.
The culprits in this case are a whopping £1.2bn worth of nominal net debt sitting on the books and a bloated collection of 3,330 pubs that needs to be slashed to restore overall profitability.
However, management is working to solve both these problems. The company sold off £199m worth of properties over the past half-year, which allowed nominal net debt to come down by £191m during the period.
Like all competitors, Punch is also working on improving food and drink offerings in an effort to attract new customers. So far this is working out well with profit per pub up 3% in the past seven months and like-for-like net income rising 1.6% at core pubs.
Turnaround efforts are going well then but there’s still some way to go. The company is targeting reducing total pubs owned to around 2,800, leaving much work to be done. Likewise, it will take time to judge whether the company’s efforts to revamp the estate towards short-term tenancy agreements with landlords will pay off in the long run.
There are very valid reasons for shares trading at 5.5 times forward earnings, but if turnaround efforts continue to progress well Punch Taverns could be one to watch for bargain hunters.
