Croda shares take coronavirus knock, but the potential still impresses me

The latest results from chemical manufacturer Croda International (LSE:CRDA), for the year to the end of 2019, revealed problems. The company’s life sciences business was the star performer in an otherwise disappointing set of results. Yet even in this area, there was what chief executive Stephen Foots called “a slight knock in the second half.” Foots dismissed the issue as “one of those things,” which is maybe not the precise analysis one might have hoped for.

The company has three strings to its bow: personal care, life sciences and performance technologies. Performance technologies, consists of coatings and polymers, geo technologies, home care, lubricants, and polymer additives. This part of the business has had a difficult 12 months, although this was very much a trend for the industry as a whole.

Personal care consists of vaccines, beauty, personal care products, and drug delivery. Life sciences consists of health care, crop protection, and seed protection. 

The numbers and the opportunity 

Croda’s numbers were not as good as last year — sales  fell 0.2% and profit before tax dropped 2.8%.

Performance technologies saw a 7.3% fall in sales and personal care fell 3%, but life sciences enjoyed a 5.9% increase. Margins in the life science part of the business rose too. In fact, life science saw a record year, despite the drop in sales in the second half.

The markets didn’t like what they heard and shares fell sharply.

Croda has suffered at the hands of the US-China trade war. There is also concern over the impact the coronavirus might have — China is an important part of Croda’s sales and supply chain.

In times like these, when stock markets look troubled, I think investors should look at the underlying story. And this is where the good news related to Croda lies.

Bear in mind that the company has a strong balance sheet — net assets of £868.8m, current assets worth 1.6 times current liabilities, and the latest results revealed a 30.2% increase in free cash flow to £201.7m.  

It’s the life sciences division that I think offers the greatest potential. The company is moving into an area called biologics, which are medical or pharmaceutical products extracted from biological sources. This is an area that is seeing increasing interest around the world. As Foots said: “The big trend in the industry…is the move to biologics.”

I do have concerns about the long-term implications of a US-China trade war. If it escalates, then a company like Croda, for which China is an important part of the business, will be adversely affected. But the combination of good products, some of which will become more popular with an ageing population, and a strong balance sheet means I think Croda’s best data is still to come. Shares have fallen by around 8% in the last few days and with every drop, I think they become more tempting.