Cranswick is reassuringly expensive

The rocket fuel driving Cranswick's eye-popping ascent to record highs still hasn't run out of steam. Over the crucial Christmas period the expected easing of volumes didn't occur, which has taken the sausage maker to record highs. Can it continue?

Total sales of its meats and pastries surged 5% in the Christmas quarter, underpinned by double-digit volume growth. Excluding its October 2014 acquisition of Benson Park, revenue jumped 4% on volume growth of 10%, as management passed falling input prices onto its customers. Its exporting business is growing too, with products shipped to the Far East up 28%.

After continuing their decline in the tail end of last year, pig prices are likely to weaken by a further 8% to around 110p/kg after the Christmas peak. Private storage aid means EU prices aren't bowing to the trend, but, as they don't move in tandem with UK prices, there might not be a rally to domestic prices any time soon. The slump in pig prices has supported Cranswick's major rerating since 2012.

With projects including a Norfolk primary processing facility, Cranswick's heavy investment programme continues to increase capacity and improve efficiencies. Net debt more-than tripled to £18 million in the period. Putting this into context, debt levels are still way below the £57 million reported this time last year and Cranswick still has committed facilities of £120 million available.

Management set the scene for a strong Christmas back in November, so forecasts are likely to remain stoic across the City today. Broker Investec has pencilled in sales of just under £1.1 billion and pre-tax profit of £633 million, giving earnings per share (EPS) of 103p.

While revenue is set to rise 8% to £1.14 billion in 2018, profit and EPS should grow 9% and 11% respectively. This isn't knock-out stuff, but investors pay for reliability in uneasy times. Numis reckons forecasts could be tweaked higher after the full-year update in April.

We flagged the UK food producer last October, warning investors that a 1,870p target price was deceptively expensive. Today, Cranswick is trading at a record high of 2,000p after surging 18% in just three months.

The same broker, Investec, now reckons the shares should be priced at 2,086p in line with rising peer valuations, which provides around 4% upside. The shares trade on 19 times 2016 earnings, which falls to below 18 times in 2018.

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.