Today Cranswick (LSE:CWK) reported its latest annual results and given I haven’t done a write up on this holding before, thought it was a good time to do so.
Cranswick is a pork producer, which processes and sells pork products for sale in supermarkets under private labels. They have also recently expanded into cooked meat products as well as selling branded pork products such as pastries and sausage rolls.
There were a number of things that attracted me to this investment in late summer of 2011.
- Pork is cheaper relative to other meats due to the speed at which pigs mature
- Returns on investment exceed 15%
- Cranswick is the largest pork producer in the UK and its competitors cannot match its scale or efficiency of its plants and equipment.
- The company is still growing and expanding with a compound annual growth rate of 9%.
When I bought Cranswick the market overall was depressed and on top of that there had been a large increase in Cranswick’s input costs. Given they are primarily selling private label products it is no surprise that their gross margins are quite small (13%) and they’re sensitive to changes in cost of goods. But I determined this was only a short term effect and invested at what was a forward PE ratio of 8.5. Today they are at a PE ratio of 14 (on adjusted EPS).
So my investment has almost doubled, but I have to now ask, is this still a good investment?
My initial valuation 18 months ago assumed an annual growth rate of 6% which was quite conservative. The latest results show an 8% growth in underlying profits. I still see plenty of opportunity going forward for growth.
However they are quite a capital intensive business, I approximate that capital investment exceeds the depreciation charge by about £5-10m per year. They need to constantly improve and expand capacity to fuel growth. That is significant for a company earning £38m last year (adjusted): a 13-26% reduction.
Using my PE ratio tool I calculate that if Cranswick were to grow at 6% a year for 10 years then a PE ratio of 15 would be appropriate at a 10% discount rate. If we increase growth to 8% for the first 5 years then that PE ratio increases to 16.4. However we must now adjust for the increased capital spending to get the true ‘owners earnings’, which reduces the PE ratio to a range of 11-14.
So I think Cranswick is currently right at the top end of my valuation estimate, although I don’t think it is currently over-valued. I’m in two minds with this investment. On the one hand, this is the perfect type of company to buy and hold forever. On the other, I could now only expect around a 10% per annum return from this long term (if my cash flow assumptions are correct). It has that durable competitive advantage that Warren Buffet always looks for. There are undoubtedly better returns available in the stock market.
But I still have plenty of cash on hand for future investments so I’m not selling just yet. I’ll hold Cranswick until I find a better investment for the money.
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