Cranswick (LSE: CWK) has released results today which show that it is making excellent progress. Its top line has risen by just under 16%, while its acquisition and integration programme has boosted organic growth. Similar performance is expected in future, which alongside its defensive characteristics makes the food producer the perfect Brexit play.
The company’s higher sales benefitted from the contribution of Crown Chicken, which was acquired in April 2016. It contributed roughly half of the rise in sales for the period, which shows that underlying performance remains sound. In fact, operating margins rose by 40 basis points to 6.6% in the first half of the year as the company’s focus on service, quality and innovation improved its overall offering.
In terms of future growth potential, the acquisition of Dunbia Ballymena a couple of weeks ago further strengthens the company’s pork processing capability. It is also increasing capital expenditure to record levels to support its growth pipeline, while it will shortly commence work on a new Continental Foods facility as well as an upgrade to its primary processing facility in Norfolk. These and other changes should improve the company’s international capabilities, where it experienced growth in revenues of 83% versus the same period of the prior year.
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As ever, Cranswick offers strong defensive characteristics due to the nature of its business. This could prove to be a major ally during Brexit, since uncertainty among investors could rise at the same time as UK economic performance comes under pressure. The increasing international sales exposure of the business also provides it with a better diversified income stream which helps to reduce its risk profile yet further.
Trading on a price-to-earnings (P/E) ratio of 20, the food producer may appear to be overvalued. However, it is forecast to record a rise in earnings of 12% this year and 8% next year. In addition, its earnings profile is resilient and relatively reliable, which means that its shares are likely to be worth a significant premium to the wider market. As such, it would be unsurprising for the company’s shares to move higher, especially if it continues to make acquisitions to supplement its organic growth.
Compared to consumer goods peer Reckitt Benckiser (LSE: RB), Cranswick’s valuation seems relatively low. The consumer staples business trades on a P/E ratio of 22.7 and is forecast to increase its bottom line by 13% this year and by a further 15% next year. Clearly, Reckitt Benckiser offers greater international exposure as well as a wider product range. However, with Cranswick’s investment in both of those areas alongside its acquisition programme, it could record similar growth levels to its industry peer over the medium term.
Given that it has a lower rating than Reckitt Benckiser as well as highly defensive characteristics, Cranswick seems to be the better buy based on the risk/reward ratio. While both stocks are likely to ride out Brexit better than most, Cranswick has the greater potential rewards over the medium term.
