Cranswick plc was added to the UK Value Investor Model Portfolio back in November 2012. Over the last three years, it has been a far more successful investment than I ever could have expected.
But before I congratulate myself too much, I must admit that – as is usual in these situations – the return of more than 35% a year has come from a mixture of sensible decisions and luck.
The sensible decisions were twofold:
1) Buying an above-average business. When Cranswick was added to the portfolio in 2012 its dividend had increased every year since 1990 and the company had produced steady growth at more than 11% a year.
2) Buying at a below-average price. Despite its high and steady record of growth, Cranswick’s shares were available with a dividend yield of 3.8%, slightly above the FTSE 100’s yield at the time.
The element of luck came in the form of the 2013 horsemeat scandal.
Buying a successful, growing, relatively defensive business at an attractive price
Cranswick is exactly the sort of business I like to see in the model portfolio. It has a highly successful track record, it’s the market leader in many areas and it operates in a relatively defensive sector so it’s less impacted by the ups and downs of the economy.
It has achieved all of this mostly by supplying commodity protein foods such as own-label sausages to the major supermarkets more effectively than its competitors.
At the time of purchase in November 2012, Cranswick had the following stats:
- 10-Year Growth Rate = 11.5% (FTSE 100 = 3.1%)
- 10-Year Growth Quality = 95% (FTSE 100 = 82%)
- 10-Year Profitability = 12% (FTSE 100 = 10%)
In terms of its financial track record Cranswick was clearly above average (see these worksheets and spreadsheets if you want to understand where those figures came from).
It had grown faster, more consistently and with higher profitability than the “average” company, as represented by the FTSE 100.
At the same time, because of fears about pig prices (a key input cost for Cranswick) the shares were trading at a low level:
- Dividend yield = 3.8% (FTSE 100 = 3.5%)
- PE ratio = 10.8 (FTSE 100 = 11.5)
- PE10 ratio (price to 10-year average earnings) = 13.9 (FTSE 100 = 13.7)
Although those valuation multiples are relatively close to the market average, they are low for a company with such a good track record as Cranswick. Typically you should expect to see above-average companies trading on above-average multiples and with below-average yields.
However, those short-term fears about pig prices and their impact on the company were keeping investors away and depressing the share price.
This created an opportunity for long-term investors who were willing to tune out the market’s short-term fears, so in early November 2012, I added 240 of Cranswick’s shares to the model portfolio at 769.1p each, which gave it a position size of about 3.5% of the portfolio.
Holding on while a scandal leads to easy gains
In January 2013, newspapers led with stories about horse meat in burgers and other “beef” products. The scandal highlighted the sometimes long and complex supply chain through which meat for human consumption moves.
Investors assumed – correctly – that the public would shift to buying more British-sourced meat products. As a result, Cranswick – which gets the majority of its meat from British sources and now breeds a significant number of pigs itself – saw its share price rise by 50% over the following few months.
That share price increase was to some extent justified by the 2013 annual results in May 2013, which saw revenues, earnings and dividends increase by 5% or more.
In fact, the company continued to increase its dividend at every interim and annual result throughout its time in the portfolio. Although each increase was only 5% or so, over a few years that starts to add up.
In calendar 2012 Cranswick paid out dividends of 28.5p. After its shares were added to the portfolio they paid out dividends of 30p in 2013, 32p in 2014 and 34p in 2015.
That’s an almost 20% dividend increase in three years which – along with a healthy boost to income – provides a tangible reason for the share price to increase.
It wasn’t all sunshine and rainbows though, and during the second half of 2013, the share price stagnated. This was – at least to some extent – down to resurgent fears about pig prices.
Although there are legitimate reasons to worry about pig prices if pigs are one of your main inputs, Cranswick was able to largely pass these cost increases onto its customers, or reduce their impact through improved production efficiencies.
Further problems appeared through most of 2014 as war broke out between the major supermarkets (Asda, Tesco, Sainsbury, Morrison) and the German discounters (Aldi and Lidl).
Investors were concerned that squeezed supermarkets would put pressure on suppliers to lower prices, which would of course hurt suppliers like Cranswick.
But once again Cranswick was able to raise its dividend through this difficult period. However, profits did fall slightly, which resulted in the share price going essentially nowhere for the whole of 2014.
Selling after rapid share price gains created an unattractive valuation
As is so often the case, the problems of 2014 did not last forever. During the second half of 2014, the oil price collapsed, hurting several of the model portfolio’s oil-related holdings. However, this was a major plus for Cranswick as oil is mostly an input cost for agriculture and food production businesses.
Subsequently, in its 2015 annual results, Cranswick announced record revenues and a 10% increase in adjusted pre-tax profits, along with a 9% decline in pig prices.
This more positive mood and continued good performance from the company pushed the share price up to the 1,700p level, producing a capital gain for this investment of over 120% in three years.
This is, of course, a fantastic result, so why have I decided to sell Cranswick now?
It certainly isn’t because the company is no longer attractive. I still think Cranswick is a great company and has, probably, a bright future ahead.
However, now that the shares have more than doubled in such a short period of time the valuation and the dividend yield are no longer attractive.
The dividend yield today is around 2%, while the yield on offer from a FTSE 100 tracker is over 4%. Similarly, Cranswick’s PE and PE10 ratios are 20 and 24 respectively, while the FTSE 100 manages 16.8 and 13.
Having said that, Cranswick’s valuation is not horrendously bad; in fact, I don’t even think it’s overvalued as its stock screen rank of 107 is still above average. But a rank of 107 out of 237 companies is not particularly impressive, and neither is a 2% dividend yield.
While Cranswick has been a great company to invest in, and one in which I would be happy to invest again, at its current price I think the best thing for the model portfolio is to sell now and reinvest the proceeds into another good company, but one with lower valuations and a higher yield.
So that’s exactly what I’m going to do. I’ve sold the Cranswick shares and will reinvest the proceeds next month into a new holding.
Note: You can read the full pre-purchase review of Cranswick in the November 2012 issue of UK Value Investor (PDF).