Is FTSE 100 Stalwart Bunzl a Good Value?

LONDON -- Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:

  • Growth in earnings
  • An upward P/E re-rating

Highly successful fund manager Peter Lynch classified steady growers as Stalwarts, which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.

Seeking durable growth
Not all companies achieve stable growth, as you can see by the aggregate performance of those in London's premier FTSE 100 index, where the compound annual earnings-growth rate has been just 0.7% over the last five years:

Year to June

2007

2008

2009

2010

2011

2012

FTSE 100 index

6608

5626

4249

4917

5946

5571

Aggregate earnings per share

537

503

427

397

527

557

Consistent, cash flow-backed growth in profits is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.

One contender is Bunzl (LSE: BNZL.L  ) , which describes itself as a leading specialist distribution group. This table summarizes the company's recent financial record:

Trading year

2007

2008

2009

2010

2011

Revenue (million pounds)

3582

4177

4649

4830

5110

Adjusted earnings per share (pence)

45.1

52.7

55.9

60.6

68.5

So, earnings have grown at an equivalent 11% compound annual growth rate, putting Bunzl in the Stalwart category.

The firm has operations in 23 countries across the Americas, Europe, and Australasia, supplying consumable products such as food packaging, disposable tableware and catering equipment, cleaning and hygiene supplies, guest amenities, personal protection equipment, packaging and healthcare consumables to various customer markets. Roughly 30% of revenue comes from grocery, 29% from food service, 14% from cleaning and hygiene, 8% from safety, 8% from non-food retail, 7% from healthcare and 4% from other industries.

North America provides 54% of that revenue, Europe 21%, U.K. and Ireland 20%, and the rest of the world 5%. It's a good business that has generated a steadily rising earnings stream that has not been overlooked by investors.

Growth seems set to continue both organically and through the firm's targeted acquisition program, which has seen the balance sheet load up with intangibles.

Bunzl's earnings growth and value score
I analyze five indicators to determine whether earnings growth can continue and if the shares offer good value:

  1. Growth: Revenue, earnings and cash flow have all been growing steadily. 5/5
  2. Level of debt: Net gearing around 88% against an intangibles-heavy net asset figure. 3/5
  3. Outlook and current trading: Good recent trading and a cautiously positive outlook. 4/5
  4. Enterprise value to free cash flow: Around 13 and above historic growth rates. 2/5
  5. Price to earnings: Around 16 historically, above growth rates. 2/5

Overall, I score Bunzl 16 out of 25, which encourages me to believe this stalwart might continue earnings growth that outpaces that of the wider FTSE 100, but the shares appear to price a lot of future growth in when compared to the FTSE's price-to-earnings ratio of around 11 and the firm's growth predictions.

Foolish Summary
Bunzl carries a fair chunk of debt but manages interest payments comfortably from its strong cash flow. Growth seems likely to continue both organically and by acquisition, but the firm's strong performance has seen the shares bid up to high levels compared to likely future growth rates.

Right now, forecast earnings growth is 7% for 2013, and the forward P/E ratio is 14 with the shares at 1,098 pence. Considering that and the other factors analyzed in this article, I think that Bunzle can stay on my watchlist for the time being.

Bunzle is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.

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Further investment opportunities:

Kevin Godbold does not own any shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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