Meaty sales

As you might expect, Cranswick is a carnivore’s paradise. It supplies pork, gourmet sausages, cooked meats, cooked poultry, hand-cured and air-dried bacon and gourmet pastry products to retailers both here and abroad. And business is good. 

In today’s Q1 statement, the company said revenue over the 13 weeks to 26 June was up 9.6% on last year, due in part to strong demand from retailers. The FTSE 250 member also said it had seen a “gradual but sustained recovery of the food-to-go and food service channel”.

Exports to the lucrative Far East markets were “well ahead” of sales over the same quarter in 2020 due to higher prices too.

Reasonable price

Looking ahead, Cranswick said its full-year outlook was in line with management’s expectations. That was never likely to send the stock soaring. However, the company’s share price was comfortably in positive territory this morning. Indeed, it’s now getting very close to eclipsing the previous price high of 4,200p.

Despite this, I think Cranswick’s stock still looks reasonably priced. A forecast price-to-earnings (P/E) ratio of a little less than 19, before markets opened, isn’t excessive. For this, I’d be getting a company that boasts a solid balance sheet. It’s also one that continues to invest for growth. With regard to the latter, it’s now successfully raised capacity at its poultry facility in Eye, Suffolk. Production at its new bacon facility in Hull has also commenced.

I’m also attracted to the consistently rising dividends. This tends to be indicative of a well-run, defensive business with predictable earnings.  

Potential threats

I suppose one potential threat to the business is the growing interest in products produced by the likes of US giant Beyond Meat. There’s certainly evidence to suggest that more people have embraced veganism in recent years. 

Having said this, committed meat-eaters are unlikely to make the switch to lab-grown substitutes quickly. Any concerns they may have about how Cranswick may go about its business may also be assuaged by the company retaining its Tier 1 status in the Business Benchmark on Farm Animal Welfare framework for the fifth year running. This essentially means that the FTSE 250 firm is highly regarded for its handling of animals. Interestingly, it is one of only four organisations in the world to receive this accolade. 

From a more general perspective, the argument that I could get faster growth elsewhere is likely true. However, this could require a higher level of risk. That would deviate from my ‘slow and steady’ strategy, especially if it involved buying stakes in headline-grabbing but unprofitable companies. It can often be the case that businesses no one is talking about make for better investments.

Still bullish

Cranswick’s stellar record of steadily improving its owners’ wealth over the years leads me to think that this would still be a great addition to my own growth-focused portfolio. Based on today’s update, the company’s track record, and fair valuation, I’d feel comfortable buying today.

The post This under-the-radar FTSE 250 stock looks great value to me appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Beyond Meat, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The rising Tesco share price

It seems that there’s renewed interest within the grocery retail market from investors following the latest takeover bids for rival supermarket Morrisons. For a long time, these stocks have been out of favour with the market. And as a result, they have begun to look relatively cheap, in my opinion. Even after the recent rise in the Tesco share price, its price-to-earnings ratio only sits at around 25. That’s a relatively small premium to the historical industry average of 20.

But is the recent rise in valuation justified? After all, if investors are basing their decisions on a potential takeover of Tesco, I think they could be sorely disappointed. Personally, I’m pretty optimistic about the Tesco share price. Not because of a possible takeover, but rather due to the underlying performance of the business.

Looking at the latest set of results, the company published some promising signs of operational improvement. The revenue generated by its supermarkets has increased by nearly 10% compared to pre-pandemic levels. This indicates that the closure of restaurants and bars has pushed many individuals to take up cooking at home, with the habit seemingly sticking even after the hospitality sector reopened. And with increased investment being made in its online infrastructure, maintaining and expanding its market share in the face of increased competition seems likely in my eyes.

Some risks to consider

A notable problem that has plagued the grocery retail sector for years is a significant lack of pricing power. With so many competitors to fend off, Tesco is restricted in how much it can charge for its products. Consequently, its profit margins are exceptionally tight, sitting around 3%. Unfortunately, these margins might be about to get squeezed some more.

With governments issuing stimulus packages around the world to reboot their economies after the pandemic, inflation is on the rise. And for consumers, that means the prices of food and other necessities are increasing. With individuals looking to save money, many may turn to discount retailers like Aldi to buy their groceries. Therefore, to remain competitive, Tesco will likely have to absorb at least part of the cost of rising inflation. Needless to say, that doesn’t bode well for its already strained profit margins. And could start pushing the Tesco share price down.

The bottom line

Despite these risks, groceries remain an essential item for everyone. And the management team’s pursuits to expand and improve its offerings both in and out of its supermarket division could be a driver of steady future growth. Therefore, I would still consider adding Tesco to my income portfolio, even after its recent rise.

The post Why is the Tesco share price rising? appeared first on The Twelfth Magpie.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

From their high points on the day of the announcement on Thursday, Tesco shares had fallen 6% by the end of Friday, with Ocado shares down 7.6% — as I write, Tesco has now shed 33% since late June 2015 to 149p, while Ocado has lost 51% since its July 2015 high point to 231p.

Tesco’s big struggle is against the cut-price bricks-and-mortar supermarket chains of Lidl and Aldi, and one of its few competitive advantages is its online retailing operation. It was the first of the UK’s big supermarkets to offer the service, though it’s not always the pioneers of a new service who end up prospering from it — so online retailing is no guarantee of Tesco’s future success.

Stiff competition

As well as Ocado and the other supermarkets, Tesco is now also up against the muscle of Amazon.com (Nadaq: AMZN), which has launched a groceries delivery service in 69 London postal districts — Amazon Prime subscribers can now get their food shopping delivered, for a fee of £6.99 per month. If that’s successful, we should see further roll-outs to other major UK cities.

Amazon’s existing delivery service is already known for its effectiveness, and for its extensive use of automation to keep wages and costs down, and that’s going to make it a serious competitor for Tesco, and very possibly a contender for the number one spot in the future.

And if it’s bad news for Tesco, it’s even worse news for Ocado, which launched amid great fanfare, but whose shares, to me, have looked seriously overvalued from day one. From its launch in 2010, it took until 2014 for Ocado to turn its first profit, and even in 2015 it only recorded a pre-tax profit of £11.9m. Funding has been tight too, with net debt of £127m reported at the end of November 2015.

Massive valuation

Looking at valuation, based on this year’s forecasts Ocado shares are on a vertigo-inducing P/E  of 110. And even with a 44% rise in EPS pencilled in for 2017, that would still drop to only 76. Ocado needs 2017 forecasts to come good, and then on top of that it needs more than a five-fold rise in earnings per share to get its P/E down to around the long-term FTSE 100 average.

And now Amazon can waltz in with its masses of cash and its full delivery infrastructure already in place, and challenge Ocado’s only real competitive advantage over the tradition supermarkets — its high-technology automation and lower costs.

While Ocado shares already looked overvalued to me, they now look even more unsustainably priced. Current forecasts don’t account for the Amazon factor, and I expect them to be revised downwards in the coming weeks and months — and that would lengthen Ocado’s P/E even further, just when it desperately needs to see it shortening.

Can Ocado survive?

A competitor that probably won’t suffer from Amazon’s entry into the market is Wm Morrison Supermarkets which looks set to benefit from its partnership with Amazon and so offset the extra competition for its own offering online. But I really do see this as bad news for Tesco shareholders — and potentially devastating for Ocado.

The post Should you sell Tesco plc & Ocado Group plc and buy Amazon.com, Inc.? appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Doing the right things

That’s certainly what I thought when I noticed that mining and commodities giant Glencore (LSE: GLEN) shares have stormed up 125% since 20 January, to 154p. Given that full year results released on 1 March reported a 69% fall in earnings per share before adjustments, that might seem like a pretty contrary reaction — especially as cost savings and reduction of capital expenditure are the order of the day.

The share price strengthening seems to be mainly on the back of modest recoveries in commodities prices, with both iron ore and copper up around 15% since their recent low points, and oil heading ever closer to $40 a barrel, from under $30 in mid-January. The trouble is, the slump in demand from China doesn’t seem to be anywhere near its end, and we still don’t know how hard the country’s growth slowdown is going to be.

While Glencore’s debt is rapidly moving in the right direction and the company seems to be doing things right just now, I think we’re unlikely to have seen the end of volatile commodities prices just yet and Glencore is still a risky choice in the medium term.

Resurgent supermarket

Even before its just-announced tie-up with Amazon, shares in Wm Morrison (LSE: MRW) had been climbing nicely, and they’re now up 50% since 11 December, to 209p. Some of that will be due to a Christmas shopping period that really wasn’t too bad. And now that Morrison’s “ambient, fresh and frozen products” are to be sold to Amazon Prime Now and Amazon Pantry shoppers, at least some of the damage done by the supermarket chain’s painfully late entry into online shopping will presumably be ameliorated — and Tesco will surely be stinging at not being the one to get the plum job.

But I’m still a bit twitchy about supermarket shares on a forward P/E of over 19, especially as price competition is sure to get harder as Aldi and Lidl keep rolling out stores almost as fast as you can work those horrid self-serve checkouts.

Recovering oil

The rising price of oil has helped Cairn Energy (LSE: CNE) shares to a 37% rise since 20 January, to 173p — although to put that into perspective, the price is still down 60% in five years. Cairn isn’t profitable yet, but unlike some smaller strugglers it doesn’t have a debt millstone around its neck. In fact, as of 31 December 2015, Cairn had net cash on its books of $603m, saying it is “fully funded … to deliver its exploration and appraisal programme, as well as to take its North Sea developments through to free cashflow generation in 2017“.

And it also has the means to buy up assets when they’re cheap, having revealed on 22 February that it has acquired another 4.5% of the North Sea Kraken field to take its stake to 29.5%. I’m usually very wary of not-yet-profitable oil explorers, but Cairn looks like a promising prospect to me.

The post Are Glencore PLC (+125%), WM Morrison Supermarkets PLC (+50%) And Cairn Energy PLC (+37%) Storming Back? appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Because that really is the problem. The big UK supermarkets kept expanding their operations and growing their margins, with Tesco in particular trying its hand at banking, insurance, car dealership, and international expansion. And they grew complacent in their increasingly affluent niches without noticing that the old and ignored “pile it high and sell it cheap” market segment was just sitting there waiting to be exploited, the way Tesco and Morrison had done in their long-forgotten pasts.

So now, while Tesco and Morrison have been closing stores to try to shed some of their cost overheads, and Morrison has offloaded its chain of convenience stores, Aldi is starting from a much leaner cost base and is doing exactly the opposite with its plans to open 80 new UK stores this year and create 5,000 new jobs. The net result will be 700 Aldi stores across the country, employing 32,000 people.

A big shift

Thomas Kuhn famously wrote of the “paradigm shift” that happens when a scientific advance overturns current understanding or assumptions, and the recession we have just endured has done something similar to the retail environment. While at one time we were all happy shopping at Tesco, Morrison and the rest, and looking askance at that funny Aldi with its shelves full of strangely-labelled foreign tins (“Ooh, Pumpelsqueezl, how nice“), millions of us have since taken a much closer look and we’ve seen equal quality (and often superior) goods at lower prices.

Do Tesco And Morrison have to go back to day zero and start all over again from the ground upwards? Well, no, and they couldn’t anyway. There is still a very large market segment for the approach that Tesco in particular takes, with its focus on various ranges of goods at different prices and perceived qualities — I’m always surprised at the popularity of expensive “Finest” ranges of packaged food products.

But they, and all the rest, have no option but to accept the shift to a focus on cut-throat margins and intense price competition, and I can see price deflation hurting their bottom lines for some time to come.

Still too expensive

After years of collapsing earnings, Tesco is forecast to finally rebound in 2017. But its shares would still be on a stretching P/E of over 19 based on today’s 178p share price, with dividends yielding only 1%. And at Morrison we’re looking at a forecast 2017 P/E of 16 on a share price of 177p, although with dividends at 3.1% (which I think is a mistake — we should have had a cut in 2015).

I wouldn’t be buying either of these now — with there being so many better bargains out there, why take your chances in such a highly competitive sector? It will be enlightening to look at the UK supermarket sector in, say, another five years. Will there still be room for all of the competitors or will we see any takeovers? I wouldn’t be surprised by the latter, and I see Morrison as perhaps the most vulnerable.

The post Will Aldi Really Kill Tesco PLC And WM Morrison Supermarkets PLC? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.