With another strong set of annual results released today (26 February) by Bunzl (LSE: BNZL), I have been reconsidering the investment case for the foodservice and janitorial supplies business. As a long-term investor, could Bunzl shares be worth adding to my portfolio?
Impressive performance
For me, the answer is yes – if I could buy them at the right price.
Bunzl has a long history of growing by acquisition. In an industry with lots of medium-sized local players, that is a smart way to grow, as long as the price is right. Last year alone it inked 10 new deals and has committed £1.7bn to acquisitions over the past four years. Today it announced a new UK acquisition and its first purchase in Finland.
Surprisingly, revenues actually fell slightly last year (despite the company calling them “resilient”) but most of that was down to exchange rate movements. The industry has experienced heavy inflation in recent years and that slowing down helps explain the lack of revenue growth.
When it comes to the bottom line though, the company’s performance was good. Operating profits, pre-tax earnings and basic earnings per share all grew by double-digit percentages.
Bright future
Bunzl has mastered a basic but effective business model.
Its customer base has high ongoing demand for items like disposable cups and cleaning supplies. The bigger its business gets, the more economies of scale Bunzl has. By offering a one-stop shop to customers, it has a competitive advantage over rivals.
The company is highly cash generative at the operating level. But free cash flows slipped last year by 9%. Acquiring companies is costly so can eat into cash flows. Last year saw a £667m cash outflow from financing activities, including £210m spent on dividends.
The dividend per share grew 9%. Bunzl shares have now recorded over three decades of annual growth in the shareholder payout, making the company a Dividend Aristocrat.
The financing costs of the acquisition model continue to pose a risk to cash flows. Slowing revenues are also a risk, although if revenues are flat but profits grow I do not see that as a problem.
I am upbeat about the long-term outlook for the business thanks to its proven strategy and large untapped customer market.
Valuing the shares
Last year’s basic earnings per share of £1.57 mean that Bunzl shares now trade on a price-to-earnings ratio of 20.
I think a quality business deserves a price premium to reflect that quality. However, after rising 31% over the past five years, I do not now see Bunzl shares as attractively priced. The current valuation offers me little or no margin of safety as an investor if the business runs into unexpected problems.
Although I would be happy to buy Bunzl shares at the right price, for now I will not be investing.
