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It is impossible to predict when the stock market’s current turmoil will end. Further falls could be ahead if factors such as high inflation and rising interest rates result in tougher conditions for a range of companies.
Equally, recent falls in commodity prices could contribute to a more modest inflation rate and allow for a less hawkish monetary policy that is more conducive to economic, and share price, growth.
Investors must therefore accept that buying shares now in any company could entail paper losses over the coming months. A long‑term view is a necessity, as is buying shares in companies with the financial strength to outlast, and even capitalise on, an uncertain economic outlook.
In Questor’s view, the FTSE 250 food producer Cranswick offers a compelling long-term growth opportunity. The company has a “vertically integrated” business model: it farms, produces and supplies a range of largely meat‑based products to the retail and leisure sectors.
Crucially, the company has an extremely solid financial position. Its debt-to-equity ratio of 14pc meant that interest payments were covered 36 times by operating profits in the 2022 financial year.
Even when aided by little in the way of leverage, its returns have been impressive. For instance, its return on equity stood at 14pc last year, while in the past five years its sales and net profits have both risen at a double‑digit rate on an annualised basis.
Acquisitions have long been a key driver of the company’s high growth rate. Last year it bought a pet food producer, a supplier of Mediterranean plant-based foods and a supplier of Spanish tortillas. These purchases provide entry into new market segments with long-term growth potential, while offering diversification benefits that reduce overall risk.
Low debt levels and an increasingly broad range of operations put the company in a strong position to make further purchases. It could even use the prospect of weaker trading conditions for companies in adjacent market segments to make acquisitions at attractive prices.
High earnings growth has allowed the company to reward shareholders with rising dividends. Last year it increased its divi by 8pc, its 32nd consecutive year of dividend growth. And as dividends are currently covered 2.6 times by earnings, their future rise could easily match, or even surpass, profit growth without putting pressure on the company’s finances.
Rising input costs are creating challenging conditions for food producers but Cranswick’s vertically integrated business model provides a competitive advantage over rivals since it can control large parts of the supply chain for many of its products. Its adjusted operating margin was maintained at 7pc last year in spite of rapidly rising costs.
Encouragingly, it said in its latest annual report that input cost inflation was being “proactively managed and recovered”. Information on its recent financial performance will be included in a first‑quarter trading update scheduled for release on Aug 1.
Despite its long record of growth, the company remains firmly focused on Britain; only 8pc of last year’s sales were from international markets. This represents a largely untapped opportunity that could act as a major catalyst on its long-term growth rate. Increasing the proportion of international sales is also likely to further diversify the business’s operations and lower its overall risk.
Since August last year, Cranswick’s share price has fallen by 26pc. Reasons for its decline include weaker demand from China, labour shortages and supply chain problems.
In addition, weaker investor sentiment towards the FTSE 250, which more accurately represents the British economy than the internationally focused FTSE 100, has contributed to the stock’s recent fall.
It now trades at 14.3 times forecast earnings, which in Questor’s view represents good value for money. Its financial strength, market position and growth potential give it the capacity to overcome short-term adversity to deliver long-term share price growth.
Questor says: buy
Ticker: CWK
Share price at close: £30.68
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