After releasing a strong half-year trading update today (10 April), FTSE 250 share Treatt (LSE: TET) is up 11% as I write this on Wednesday afternoon.
Over the past five years though, the shares have moved up by only 12%. In other words, before the latest update, they have basically moved sideways over the long term.
Digging into the share price history in more detail, things look more interesting. Over the past few years, Treatt shares soared then fell sharply. They are now 65% below where they stood at the start of 2022.
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But the business is a proven one: in the first half it generated profit before tax and exceptional items of over £7m, slightly better than last year.
It has an established customer base and long expertise in its specialist field of flavouring ingredients.
Could now be the moment for me to buy in, hoping for sweet long-term returns?
Good business, once-stretched valuation
Billionaire investor Warren Buffett says he likes to buy into great businesses at attractive prices. I take a similar approach.
I think Treatt has a lot going for it as a business. There is high demand from customers like food and drink makers. Treatt has its own factories and proprietary formulas that mean it can offer unique products to its customers.
But even after the 65% share price decline, the FTSE 250 stock continues to trade on a price-to-earnings ratio of 18.
Yet while the company has grown sales strongly in recent years, sustained earnings growth has been harder to come by. Last year’s post-tax profits of £10.9m were almost the same as in 2020 (and markedly below the prior two years).
Several years ago I thought the Treatt share price was too high. Even now it has fallen back, I do not think it is in bargain territory. It certainly is not what I would call a steal.
Looking to the future
But just because a share is not a bargain does not mean it could not still be a good long-term investment.
Treatt does have some appeal to me as an investor. Although first-half revenues were 5% smaller year on year, I think the company’s international manufacturing footprint expansion over recent years has helped set it up for long-term growth.
Net debt is modest at £10.3m, and the company said it has a solid sales order book and healthy sales pipeline.
But while it may be a good business, is it a great one?
Thinking about value as an investor
Profit margins in its industry are decent but not huge: Treatt’s net operating margin was 11% in the first half. Price jumps in commodities like orange oil can lead to weaker demand, as happened during the period. Meanwhile, as consumer tastes and trends change, the company needs to keep spending money on making its product offering relevant.
While it has been consistently profitable in recent years, those earnings have moved around more than I would like – and not always in the right direction.
For now, Treatt strikes me as a perfectly good business but not an obviously great one. I do not think its valuation is especially attractive and will not be adding this FTSE 250 share to my portfolio.
