When a company such as Bunzl has had such a good run, and when the shares are at a new high and are selling on a multiple of more than 21 times earnings, one is entitled to ask how it could go wrong.
The figures for 2014 show underlying progress across the group despite a number of negatives, not least exchange rates. Others include the effects of the polar vortex in the US late last year and economic slowdown on the continent and in parts of Latin America.
Bunzl distributes a range of workaday cleaning, catering and other goods to small businesses worldwide. That earnings multiple would seem to be far out of reach of such a mundane business, even if there is no obvious comparator. It is the result of an extraordinary record that has made a barely known business the 63rd largest on the stock market.
Bunzl reckons it can grow each year by more than the underlying GDP rate, and has offered investors an annual return of about 10 per cent during the past decade.
It does this by multiple bolt-on acquisitions, two more announced yesterday in Spain and Canada. As Bunzl is one of a kind it does not indulge in competitive bidding and management tend to stay around.
A good fourth quarter, the US notwithstanding, meant that organic growth rate actually increased as the year went on. Reported pre-tax profits were up by 4 per cent to £387.8 million. So where can it go wrong?
That acquisition policy could go bad, except that the 100 or so deals over the decade have cost an average of £19 million apiece, so an awful lot would have to go wrong to make a difference. The flow could slacken off, and last year’s total cost was indeed lower, at £211 million against £295 million, but even this is not a long way off the historical average.
The company reckons a £300 million cost a year could easily be met out of cashflow and still allow for dividend growth — last year’s total was up by 10 per cent to 35.5p.
Someone else could come into the market, except that Bunzl’s lead looks unassailable.
I have regularly tipped the shares, up 22p at £19.50, most recently in June at £16. I would continue to buy for the longer term, even on this multiple.
£211m spend on acquisitions
My advice Buy long term
Why Earnings multiple is high, but Bunzl is a one-off with a strong track record, while the business model would seem to guarantee further growth
From the start of the new academic year this autumn, the cap on student numbers will be lifted, meaning that there will be a large increase in the number of university places available.
Unite Group, which provides student accommodation, makes a useful point. The top universities, such as those in the Russell Group, already effectively operate without a cap. The bottom end of the market attracts students who cannot get into the middle rank.
If the latter is allowed to increase numbers, it will be at the cost of that bottom end. Unite operates mainly at the top and middle ends, in provincial cities whose universities are already growing.
The company is one of those, like Bunzl, where all the numbers appear to be heading in the right direction, with the availability of beds always likely to fail to keep up with demand.
A sharp rise in earnings per share means that the yield on the net asset value, which itself rose by 13.6 per cent to 434p, has hit 4.5 per cent, a year ahead of plan. Unite is getting a 9.5 per cent yield on existing properties, healthy by any standards. The risks are some unexpected political shock and rising costs of development — the company is already lessening its exposure to London for this reason.
Unite is moving towards Reit status, which will boost dividend income. The shares, up 6p at 530p, sell on a 20 per cent premium to NAV, which sounds pricey. Those market drivers and the supply of new developments still make them a long-term buy.
11.2p Total year’s dividend
My advice Buy long term
Why Forward trends are remarkably favourable
The supply of drugs to animals, including pets, is a limited market, but as anyone who has visited a vet recently will appreciate, a lucrative one, which is why much of it is controlled by Big Pharma.
This leaves specialists like Dechra operating in the areas that the big firms do not yet dominate; products such as a treatment for equine lameness that has just been launched in Britain and the United States.
Selling compounds to animals is much the same as selling them to humans. You need regulatory clearance, while the market grows slowly, often by word of mouth.
Dechra, which has been having difficulties marketing its antibiotics to Europe because of worries about growing resistance, now wants to export more of these to less developed markets. It also wants to expand into the US, although acquisitions will be tricky.
With so much product going abroad, currencies are always a drag, but operating profits were up by 4 per cent to £23.1 million in the first half to the end of December. The shares have been a strong market since the autumn and, up 26p at 935p, sell on 24 times earnings. I have tipped them before, but future progress may be slow.
Revenue £101m
Dividend 5.12p
My advice Avoid for now
Why Shares have come a long way and look fully valued
And finally . . .
DS Smith is another of those companies in a seemingly dull area, packaging, that has grown strongly by acquisition as the market consolidates and customers such as the big supermarkets and consumer goods makers seek to source from one supplier. The latest deal strengthens its position in southeast Europe. The company is buying Duropack, for €300 million, accompanying the deal with a reassuring trading update and promising earnings synergies that bring the cost down to less than six times earnings.
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