Shares in FTSE 100 chemicals company Croda International (LSE:CRDA) are down 30% over the last 12 months. And to say the company’s latest earnings report is ‘mixed’ is probably charitable.
The headline number is that pre-tax profits fell almost 70% during 2023. But rather than being one of doom and gloom, I see the story as more like the good, the bad, and the ugly.
The ugly
Let’s start with the ugly, which is pretty much all of the numbers Croda reported. Sales, operating profits, and earnings per share all came in significantly lower than they did in 2022.
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Overall sales came in at £1.69bn, a 19% decline on the previous year’s results, with pre-tax profits falling by almost 70%, from £780m to £236m. And earnings per share fell 74% to £1.23.
All of that looks pretty ugly, but there’s something it’s important to note. Croda divested two of its divisions last year and the stated results don’t include the effects of this.
Adjusting for the divestments, pre-tax profits and earnings per share were both down around 38%. That’s still a significant fall. But it could have been a lot worse.
The good
To some extent, the results won’t have come as a surprise – Croda has been warning about a cyclical downturn due to high inventory levels throughout 2023. But the news wasn’t all bad.
Despite the downturn in sales and profits, the company actually increased its dividend. This was boosted from £1.08 to £1.09 – a yield of 2.25% at today’s prices.
Furthermore, management remained resolute in its view that the drop in demand is a cyclical low, rather than the new normal. This was backed up by some positive projections for 2024.
Sales are expected to grow in the forthcoming year by between 5% and 10%. So there’s a chance the latest report could be as bad as it gets for Croda shareholders.
The bad
That’s the good news. But while it’s worth investors paying attention to this and keeping it in mind, there are a couple of reasons Croda shares aren’t rallying on the news.
One is that the sales increase the company is expecting isn’t necessarily going to provide a huge profit boost. Earnings growth is set to be lower as growth comes from divisions with lower margins.
Another is the uncertainty over when demand in key areas will recover. Management said its expectation is that the lows are cyclical, but was worryingly quiet about when demand might pick up.
This makes the outlook for Croda hard to forecast for investors. And at a price-to-earnings (P/E) ratio of 20, the stock is arguably valued for growth to come sooner, rather than later.
Short-term risk, long-term reward?
Croda shares are in a bit of a tough spot. The company’s balance sheet should allow it to make it through a downturn without any existential problems and benefit from a recovery when it comes.
As I see it, management’s doing everything right. But the risk for the company is that the timeline for recovery isn’t in its hands.
I don’t think buying Croda shares at today’s prices and being patient is a bad idea. I just happen to think there are other better opportunities at the moment.
