The Associated British Foods (LSE: ABF) share price slumped badly in 2022.
But since then, they’ve climbed back, and we’re looking at a 25% hike in the past 12 months. The stock is down over five years, though. So could this still be a good long-term buy?
I think it could.
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Trading update
Unlike some others on the high street, it seems Primark had a good Christmas period. According to the latest trading update, revenue at the clothing chain rose 7.9% in the 16 weeks to 6 January.
Overall, group revenue rose by 5.4%, with only the agriculture segment losing ground. Sugar production topped it out at 13%.
These figures are at constant currency, with actual exchange rate figures showing a modest total 2.8% rise. But it’s arguable that constant currency gives a better view of a firm’s underlying health.
The jewel
For many investors, Primark is the jewel in the crown.
The update said: “Sales of womenswear and menswear were strong particularly in performance wear, leisure and tailored clothing and in our Rita Ora collection. Sales of our Christmas ranges were also strong and sold through well.“
But, Primark can also mean a bit of a headache when it comes to trying to put a value on the stock.
Should we judge it based on all the group’s food offerings, or as a high street clothing retailer? Might it all be better split into two?
Just fine like this
For me, I like it the way it is for two reasons. One is that ABF’s divisions seem to be run efficiently, and I don’t see a split leading to any real boost for either half.
And second, if we buy the shares, we get some diversification from just one investment. And I reckon the two halves are both in long-term safe businesses.
So how should we assess the Associated British Foods stock valuation?
Forecasts
Looking at general measures, we see a price-to-earnings (P/E) of about 13. We do need to be careful with forecasts. But the brokers see earnings growth in the next three years, which could drop the P/E to 11.
That looks good to me, but there’s another thing I always check. That’s net debt, which stood at £2,265m for the year to September 2023.
It was up a fair bit on the £1,764m from 2022. But for a company with a market cap of £17bn and annual revenue of nearly £20bn, I’m not worried at all.
Great company?
The surprise increase in UK inflation shows we’re not out of the woods yet, and stocks like this could face new pressure.
The recent share price rise could lead to some profit-taking too, so I think there could be share price volatility ahead.
But I have to echo billionaire investor Warren Buffett‘s thought that a wonderful company at a fair price is better than a fair company at a wonderful price.
And I think Associated British Foods could fit that bill for long-term investors.
