News from two FTSE 250 companies confirms my positive view of these businesses and the long-term value they offer investors today.
Strong brands
Consumer goods group PZ Cussons (LSE: PZC) released a trading update, saying “the outlook for the financial year ending 31 May remains in line with expectations”.
The company reported a good performance across its brand portfolio in Indonesia and from its beauty division in the UK, whose brands include Sanctuary and St Tropez.
Conditions were tougher for the UK washing and bathing division. However, new product launches under its Imperial Leather, Carex and Original Source brands and margin improvement initiatives offset higher costs as a result of the weaker pound. Similar initiatives improved profitability in Australia, despite ongoing challenging trading conditions. Meanwhile, the company reported some improvement to what has been a challenging backdrop in Nigeria for a number of years.
Elsewhere, trading was in line with expectations in the relatively small markets of Poland, Greece, Ghana, Kenya, Thailand and the Middle East.
Long-term prospects
Cussons is a well-managed business with some great brands, as well as geographical diversification. However, trading conditions happen to have been toughest in its largest markets (particularly Nigeria) in the last few years, so geographical diversification has mitigated rather than prevented downward pressure on revenue and profit.
These conditions won’t always prevail and with Cussons’ steady geographical expansion, the impact on the group of trading in any single market will also reduce over time.
The shares, have been in the doldrums for a number of years and I reckon now could be a good time to buy a slice of the business for the long term. At 330p and based on current-year earnings expectations, Cussons trades on a P/E of 19.9, which compares favourably with larger peers Unilever (22.7) and Reckitt Benckiser (22.3).
Power play
Drax (LSE: DRX), whose main asset is the giant power station of the same name, has endured a truly torrid time over the last few years. In 2012, it started huge investment in transforming this strategically important asset for UK power supply from coal-fired to biomass, only for the government to remove the Climate Change Levy exemption in 2015.
In addition to the government reneging on its commitment, Drax’s troubles were compounded by the challenging commodity markets of the last few years. This has been unfortunate for long-term shareholders, who have seen the company’s earnings and share price collapse. However, I believe Drax has bright prospects for investors buying at around 320p today.
Earnings are set to more than double this year, followed by an increase in excess of 50% next year, giving price-to-earnings growth (PEG) readouts of 0.2 and 0.3, which give the shares potential to move considerably higher in coming years.
With earnings advancing from a low base and the company also starting to diversify through acquisitions, I believe it has a sound strategy to deliver what the chairman described at today’s AGM as “long-term sustainable value for our shareholders”.