Shares in FTSE 100 distributor Bunzl (LSE:BNZL) crashed 25% on Wednesday (16 April) after the firm’s Q1 trading update. That puts the share price back where it was in March 2021.
I won’t keep anybody in suspense here. I think the drop is a sharp overreaction and I’m in the process of figuring out how to buy this for my portfolio as soon as I can.
Why is the stock down?
There wasn’t much to like about Bunzl’s performance in the first quarter of 2025. Sales from existing businesses were down almost 1% and margins contracted, amplifying the hit to profits.
As a result, the firm lowered its guidance for 2025 and paused its share buyback programme to strengthen its balance sheet. So it’s not a surprise the stock fell sharply in response.
One reason Bunzl identified for its weak results is a difficult macroeconomic environment in the US. And while the firm’s taken action to address this, it remains a significant risk. Ultimately, the FTSE 100 company can’t do much about the economic environment. But I think a 25% fall in the company’s share price is a big overreaction from the stock market.
Reasons for positivity
On balance, Bunzl’s latest report is bad. But there are a few points that I see as positive and I think it’s important not to overlook these. The contribution to revenues from acquisitions was quite strong – almost 6%. This has been a key source of growth for the FTSE 100 company and it’s encouraging to see this working well.
I’m also encouraged to see management acknowledging the weakness. CEO Frank van Zanten stated his dissatisfaction with the results, rather than trying to downplay the disappointment.
Lastly, Bunzl’s forecasting a rapid recovery. Operating margins in the first half of 2025 are set to fall to 7% (vs 8% in 2024) but are set to recover to 8% for the full year (vs 8.3% in 2024).
Am I buying?
It’s been a disappointing three months for Bunzl and there’s no guarantee this won’t continue. But even the best businesses go through difficult periods and I’m looking to take advantage.
When it comes to buying the stock, the challenge for me is that I don’t have cash to invest at the moment. So in order to buy right now, I’ll need to sell something. I’m reluctant to do this, since I quite like my existing investments. And while I like Bunzl shares very much at today’s prices, I don’t think I need to be in a rush with this one.
I might be wrong, but I don’t see this as a situation that’s likely to reverse in the next couple of weeks. So my plan is to buy the stock when I next have cash available.
Potential returns
At the start of the year, Bunzl committed to investing £700m a year into growing its business. At today’s prices, that’s 10% of the firm’s market value. If the company can get past the current challenges, the stock could be a great investment for me. And I think the drop in the share price means the odds are in my favour.
