For any stock to get into my portfolio, I need to imagine holding it for decades into the future. Flash-in-the-pan businesses with weak underlying fundamentals that might eventually turn a profit don’t cut the mustard for me. Instead, I look to invest in businesses with an economic moat that can flourish throughout multiple business cycles. At the moment, I have my eye on one exceptional blue-chip FTSE 100 stock that’s seriously unloved by the market.
Finger in many pies
Associated British Foods (LSE:ABF) is quite literally a one-of-a-kind business. I don’t know of any other company that owns a leading high-street fashion brand while also being one of the largest sugar producers in the world. In fact, ABF is really a collection of varied businesses that also includes groceries, agriculture and ingredients.
This diversification, I believe, is ultimately its greatest source of strength and competitive advantage. At the height of the pandemic when Primark stores were closed, it was its motley collection of food businesses that took up the slack and enabled the company to remain profitable.
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Today, as inflation rips through the economy, diversification is likely to be a key driver of its continued success. The company had already announced price increases for its autumn/winter clothes offer. For now, it’s unclear what effect this might have on price-sensitive customers.
In its sugar business, the latest quarterly trading statement revealed that elevated commodity prices helped to drive a 7% increase in revenues compared to the same period last year.
It was a similar story in its agriculture division, where soaring wheat prices meant that farmers rushed to buy ABF’s crop protection products to maximise yields.
Primark goes online!
The most exciting development to come out of ABF’s update is that Primark is to start selling clothes online, initially in a click & collect test phase only.
The range of clothes on offer in the trial will be exclusively from its children’s range and limited to 25 stores across the northwest. ABF believes that such an offering has the potential to satisfy unfulfilled demand, as well as helping to drive footfall from both existing and new customers. Around 40% of the ranges in the trial will be exclusive to click & collect.
The orders will be processed and dispatched manually from a dedicated UK distribution centre. This could increase labour costs in the short term. However, the business is expecting to introduce automation in due course. Additionally, returns will be free of charge.
ABF is undervalued
Today, ABF’s share price is trading only 5% above what it was at the height of the Covid sell-off. To me, that makes no sense.
All its Primark stores are open. Retail selling space increased by 0.3m sq ft since the beginning of the financial year. This year, a further 0.5m sq ft will become available in total. Five further stores will open this year, many in high-growth markets.
Now, as Primark takes it offering online and ABF’s other businesses capitalise on higher commodity prices, I believe it’s only a matter of time before the market cottons on to this ‘hidden’ gem. That’s why I recently added to my position.
