Today’s Falling Knife: Croda plc Fails To Excite

Croda International (LSE: CRDA), the marketing and technology company that produces and sells speciality chemicals, today released a subdued interim management statement, sending the shares down 7% in early trade.  Turnover was up 4.4% to £267.9m with underlying sales up 0.8%.  Group pre-tax profits increased 5.4% to £58.6m in the quarter.

The consumer care segment saw sales up 3.2% to £145.4m with strong sales in Western Europe and North America but sales continuing to decline in Eastern Europe, Middle East and Africa.  Crop Care continued to see double digit growth in Europe. 

Performance technologies sales were up just 0.4% to £95m and the comparatively minor industrial chemicals segment continued to see strong growth with turnover increasing 31.6% to £27.5m, bolstered by the acquisition of Sipo in July 2013.

Cash generation was good in the quarter with net debt falling £8.6m to £213.7m. This was despite a £45.6m increase in borrowings due to the acquisition of 65% of the equity of Sipo in the quarter.

Commenting on the outlook, Martin Flower, Chairman of Croda said: 

“Croda has continued to generate a steadily improving underlying sales performance through every quarter of this year despite challenging market conditions. We continue to benefit from the strong demand for innovation and remain particularly encouraged by the progress that Croda is making in Asia and South America. However, with currencies continuing to weaken and market conditions expected to remain subdued, fourth quarter profits are likely to be similar to quarter three. Looking ahead, the Board remains confident that Croda’s strategy will continue to deliver progress into 2014 and beyond.”

Croda has performed well in recent years with earnings per share growth averaging 38% for 3 years until the last full set of results which saw growth slow to 8%.  This trading update suggests current year growth will be around 4% which is a concern for growth investors considering the price to earnings ratio is approaching 20 times.

The market has reacted badly initially with a 7% drop in the share price this morning.  The shares are now 15% down on the April 2013 high of 2,846 pence.  Was this an overreaction or has Croda come to the end of a growth spurt which saw a 375% gain in 5 years?  The company’s debt position is low at 8% of market capital but then the tangible assets are even lower at 4%.