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?
Valuation
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.
Disclosure: Long CWK
Investing Sidekick
Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.
“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)”
This more or less exactly sums up my conundrum when selling it. My value instincts said it was expensive and that I should sell – the whole ‘don’t expect growth, value on its current prospects’ sort of thinking – but you look at a graph of its net assets and this is a company which just compounds cash like a machine over time. It inexorably churns out money for its shareholders.
I went the other way and sold, but this is one of the many areas I feel my inexperience. I am trying to get that balance between value and quality right – and knowing when to slightly relax my criteria for a company which ticks the right boxes.
.. all that said, I was slightly concerned about returns. They are extremely high, striking me as almost unfeasibly so. That always makes me a little more cautious and wary of the fact that the tug of competitive forces is downward and not upwards.
You’re right about the returns, very impressive for such a mundane business.
It’s hard to look at their 10 year performance and sell, part of me thinks I’ll look back in 10 years and think “why did I sell!” Doesn’t help that I haven’t found anything better to put my money in yet.
I had the same problem with Walmart, I initially decided to hold, but then a few weeks later changed my mind and sold, so will probably end up doing the same with this one 🙂