LONDON -- Take a global industry selling the most essential of essentials -- food -- to a growing and increasingly affluent global population. Add a business with several strong market niches and brand names. Fold in a 55% family shareholding, which enables management to take a long-term view. Garnish with a side of diversification into budget retail fashion.
These are the ingredients that make Associated British Foods
Inevitably, sugar profits fluctuate in a commodity-like fashion, but emerging-market consumers are progressively getting a sweeter tooth. Sugar is the tobacco of the food sector. ABF's sugar revenues rose 28% in its latest third-quarter results.
The company's other food businesses include an ingredients division and a grocery division that owns such well-known brands as Ovaltine, Twinings, Ryvita, Jordans, Silver Spoon, and Patak's. That last name hints at a strong niche position in ethnic foods, which was bolstered this month by the acquisition of Elephant Atta -- the leading manufacturer of flour for chapattis -- from struggling Premier Foods. Grocery revenue rose 15%.
And then there is Primark. The budget fashion chain sits oddly with ABF's food businesses, but it's hard to argue with its success. Having held prices to support market share when cotton prices rose in the first half of this year, the company is now set to enjoy rising margins as the price of cotton eases.
Primark's unique selling proposition is to provide up-to-the-minute youth fashions at prices cheap enough to be disposable. It is no accident that the four new stores it opened in the last quarter were all in Spain, a country struggling with 25% youth unemployment. Retail revenues rose 14% in the last three quarters, compared with last year.
Both defense and growth
Those three elements of a leading position in the global sugar-processing market, a collection of strong consumer brands, and a dominant budget fashion chain give ABF both defensive and growth qualities.
The shares are an attractive long-term hold, though maybe a little pricey at present for stake building. At 1,284 pence, they are trading on a historic yield of 17.4, dropping to 14.8 on a prospective basis.
FTSE 100 peers
Although food and agriculture is a recognized global investment theme, there are surprisingly few plays on it in the FTSE 100. The food producers sector has just two other members.
There is Unilever
And there is Tate & Lyle
It supplies the major food and drink manufacturers with sweeteners and starches used in the production of packaged foods and fizzy drinks. It is a play on the healthier-eating trend as Westerners reduce their consumption of sugar, salt, and fats. It perhaps provides an interesting negative correlation with ABF's sugar business.
After suffering heavy losses in the year to March 31, 2010, the company has produced impressive results in the last two years. It trades on a lower price-to-earnings ratio of 11.7.
Smaller vs. safer
There are some interesting smaller companies in the sector -- firms such as Wynnstay and Carr's Milling Industries -- but many investors prefer to stick with blue chips.
The mathematics of market capitalization means that most money must go into the largest companies. And it's perfectly possible to produce sparkling returns from blue chips. There are more ideas for blue-chip investing in this free Motley Fool report, "8 Shares Held By Britain's Super Investor," which tells you more about the investing style of fund management legend Neil Woodford. You can download it here.
Just being in the right sector does not guarantee success. The travails of Premier Foods are an object lesson in how excess debt can bring down a business. It is now in the throes of a restructuring, with valuable brands being sold off to repair its balance sheet. But good stock-picking in the right sector reaps rewards.
Further investment opportunities: