Expect fat profits at Cranswick

Sausage maker and headline writer's favourite Cranswick has had a stunning few years. Its share price has doubled since 2012, driven substantially by a slump in pig prices which reduce costs. It's also breeding more pigs itself these days, and branching out into other products. Now, we're told that the company sold more sausages than expected in the first half, and that's triggered both upgrades to profit forecasts and another surge in the share price.

Revenue rose 10% in the six months to 30 September, says Cranswick, slightly ahead of management's expectations. Volumes for most products were up sharply, and the acquisition of cooked poultry producer Benson Park has chipped in this time. Strip out Benson and sales from pig breeding, and revenue was still up 7%. Volumes actually rose by 10%, but Cranswick has cut prices as costs fall - pig meat makes up about 70% of the cost of sales. All the numbers will be confirmed at the interim results on 30 November.

With margins also expected to have improved, Investec Securities thinks first-half pre-tax profit will be up about 18% at £30.5 million. Full-year revenue estimates increase to £1.06 billion, which £1.5 million dropping through to the bottom line. That gives an annual profit of £61.5 million, or earnings per share of 97.5p. Upgrades for 2017 give £64.4 million and 102p, respectively.

(Click to enlarge)

And Cranswick is spending heavily on the business. Work on its Norfolk primary processing facility cranks up this quarter, with the £6 million investment designed to build capacity. Major works at Benson remain on track, too, and will be commissioned ahead of the 2015 peak Christmas trading period. Despite this, net borrowings are below the previous quarter's £12 million and "comfortably lower" than the £22.4 million reported a year ago.

"Cranswick continues to work closely with its customers and to maintain its focus on service, quality and innovation to deliver exciting, competitively priced products in market conditions that are expected to remain competitive through the second half of the year," said the firm. "This approach, allied to a broadening product portfolio and an anticipated strong Christmas trading period, means the business remains very well-placed to deliver further growth this financial year.

On Investec's forecasts, Cranswick trades on 16.8 times forward earnings, dropping to 16 times a year later – over the past year the multiple has been nearer 14 times. But the broker thinks the shares are worth 1,870p. While that looks ambitious, calling Cranswick shares expensive in the past has proved a costly mistake. It's a high-quality, well-run, cash generative business with a record of beating forecasts. Betting against it ahead of Christmas would be foolish.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.