A risk-averse investor, who nevertheless likes a share with good growth prospects, needn’t look far and wide for a good bet. FTSE 100-listed conglomerate Associated British Foods (LSE: ABF) might have had a poor run at the equity markets in the past year, but its share price is recovering now. I believe there is enough wind in its sails to allow for further gains in the long term.
Here are three reasons why.
1. Diversification is the name of the game
ABF’s geographical diversification works in its favour, especially at a time when growth in advanced economies is expected to cool off as per the IMF’s latest predictions. While over one-third of its revenues come from the UK, the rest are from its Europe and Africa, Americas and Asia Pacific operations.
I also like that the business lines are quite varied, including retail, grocery and sugar, serving as a nice cushion against sector-specific challenges that can otherwise derail growth. Half the revenues are from retail, while the rest come from the other segments including sugar, agriculture and ingredients. All segments, save sugar, have seen profit increases in 2018 for this producer of Twinings tea and the stevia leaf-based sugar substitute Truvia.
2. Promising retail expansion
Significantly, even the retail business which can be vulnerable to cyclical fluctuations, is thriving. It’s driven by Primark, which has recently reported an impressive 25% increase in profits. Compare this to FTSE 100 retailer, Next‘s performance, whose financials aren’t looking quite as rosy.
The brand has been launched in the US and will expand there, which sounds like a good move to me since it’s a large and growing consumer market. Of course, it remains to be seen whether it can make its mark, but even without the US market’s help, Primark seems to have a lot going for it. It just opened its largest store to date in Birmingham, reportedly to impressive footfall.
3. Worthy investment, despite some weakness
Clearly, ABF’s successive retail wins have kept the share price elevated, despite the fact that the group’s latest overall results have shown a meagre 1% increase in revenues and a decline of 1% in pre-tax profits. As a result, the company’s trailing price to earnings ratio is now at 21.8x, which is definitely not cheap. Compare it to a 13.5x ratio for Next and 18.3x for grocery major Tesco.
Even with the price increases, however, the levels are still lower than the five-year average and way below the highest levels. To me, for this reason alone, there’s a case for making an immediate investment. I wouldn’t be deterred by one set of lukewarm results, especially when retail and grocery have promising prospects. While it’s likely that there could be some short-term corrections in the price, and that would be the ideal time to buy this share, I would still put in £1,000 right away and accumulate more on dips.