value and opportunity

After Dart Group and Braemer, another UK stock with interesting characteristics is Cranswick Plc.

Cranswick according to Bloomberg

Cranswick plc manufactures and supplies food products to grocery retailers in the United Kingdom and the food service sector. The Company supplies fresh pork, gourmet sausages, charcuterie, cooked meats, sandwiches, and dry cured bacon. ”

Standard valuation metrics are extremely unspectacular:

Market Cap 390 mn GBP
P/E: 10.3
P/B: 1.6 (P/B tangible 3.1)
P/S: 0.5
EV/EBITDA 6.8
Div. Yield 3.9%

However what makes Cranswick interesting in the Boss model is the really high and constant ROEs over the last 10 years:

	BV/share	Dvd/Share	EPS	CI	ROE (CI)
2002	147.81	0.13	0.31	0.30	21.7%
2003	165.63	0.14	0.30	0.31	19.9%
2004	210.76	0.15	0.39	0.59	31.3%
2005	251.59	0.17	0.51	0.56	24.2%
2006	295.36	0.19	0.50	0.61	22.2%
2007	335.86	0.21	0.52	0.59	18.8%
2008	358.33	0.23	0.41	0.43	12.5%
2009	409.01	0.25	0.70	0.73	19.1%
2010	463.79	0.29	0.75	0.80	18.3%
2011	514.1	0.31	0.79	0.79	16.2%
		2.06	5.16	5.71

So even in real tough environments like 2008, Cranswick is still able to manage 12% ROE calculated on the basis of the comprehensive income which I find pretty remarkable.

So we do have a company which trades significantly (1.6) above book value, but churns out 20% ROE over the last 10 Years with a standard deviation of only 5%.

If I just look at my current database of around 1.100 stocks, I only have 12 stocks which show similar ROE/Std deviation characteristics and they trade on average at 2.8 times book value. Among those are well-known market leaders like Fastenal, Fielmann or Becton Dickinson.

Balance Sheet quality (based on “old” annual report 2010/2011) :

Debt:
Debt to total assets is at only 10% and has declined since 2004 when they had around 40% gross debt to total assets.

M&A
Cranswick did 6-7 smaller acquisitions in the last 10 years, mostly in the 15-20 mn GBP range (Sandwich Factory in 2003 for 15 mn, Delico in 2006 for 18 mn, Bowas of Nrofolk in 2009 for 18 mn). There was one larger acquisition, Perkins Chilled Food for 80 mn GBP in 2005. All in all it looks like a very reasonable add-on acquisition strategy funded out of free cash flow

Pensions

No problems here, company has only a small DBO plan with ~17 mn GBP and a deficit of around 2 mn GBP.

Operating Leases

Also only 12 mn GBP of total operating leasing liabilities as of year end 2010/2011

So balance sheet quality looks really good and conservative.

Management /Shareholders

According to Bloomberg, the largest Shareholder is fund manager Invesco with ~30%, the rest is distributed among several fund managers, however no “famous” value investor amongst them.

Management

In 2011, management received a total comp of 3.8 mn GBP, based on total profit of 35 mn GBP, that’s 11% which is quite a lot. But maybe its OK for a UK company. Management holds around 400 k shares which is not much. However there is a LTIP with a couple of hundred k shares for the management which hopefully should align interest to a certain extent.

Business

It seems that Branswick sold a lot of their products not under their own brands but as private label to UK supermarkets. Somewhere in the annual report they state that the two largest customers (most likely Tesco and Morrison) account for almost 50% of sales.

According to the annual report they try to establish own brands with the help of Jamie Oliver and Weight Watcher’s:

They seem to concentrate on pork products. It seems that pork as one of the cheapest “red meats” has benefited from price increases for lamb and beef as strained UK customers then substitute with pork. This might also explain part of the resilient returns.

Unfortunately, they do not split out the different food categories themselves. According to the overview they also deliver sandwiches for airlines and are moving more into other staff like pork pastries.

One question which I could not answer was the issue why the UK supermarkets allow Cranswick to earn relatively high returns. If I look at comparable German companies, they earn much lower returns, especially if they sell under private label.

Maybe UK supermarkets are not as tough as Aldi and Lidl in Germany with their suppliers or Cranswick has some competitive advantages like size. They stress their origin as pig food producer and pig rearing, so I guess they have very long-established relationships with pig farmers etc.

What others say

As always for UK stocks, you find interesting posts from the “usual” suspects:

Expecting Value has an excellent post mentioning that Cranswick seems to be able to increase exports significantly. He also links to this fantastic chart which shows Cranswick’s growth over the last 2 decades:

A quick look at the stock chart:

Interestingly, Cranswick underperformed against the FTSE 250 index significantly. Against Tesco, they just managed to “equalize” the score lately:

Even Swiss meat company Bell AG managed to significantly outperform Cranswick:

However, if we look at 2004/2005, Cranswick traded at around 2.5-3 times book and EV/EBITDA of 12, almost double the level of today.

Summary: At a first glance, Cranswick looks like an interesting “boring but sexy” company. They generate nice ROEs very consistently and manage to grow even in difficult times. Although the stock is not “dirt cheap”, I will do a “deep dive” into the business model and valuation hopefully next week.