This humble flour miller has trounced the wider UK market over the last decade but it still looks like good value.
Over the past ten years, Carr's Milling Industries (LSE: CRM) has outperformed the FTSE 100 by a comfortable 375%. That's a lot better than quite a lot of popular shares have managed -- even those relatively unaffected by the present credit crunch and banking meltdown.
Take BP (LSE: BP), for example. One the five largest constituents of the index, it has underperformed it by 12.5%. And while Tesco (LSE: TSCO) has outperformed FTSE 100, it's done so by a more modest 100%. GlaxoSmithKline (LSE: GSK), another FTSE 100 top five constituent, has underperformed again, this time by almost 50% over the same ten year period.
But while a whopping 375% outperformance is worth noting, it's obvious that small caps like Carr's are far better positioned than mega caps to perform such a feat. In the run up to the 2007 market peak, any number of resource-rich businesses in oils and metals turned in stellar returns.
Slow and steady wins the race
Yet here's the surprise. Carr's isn't in oil exploration or mining, though. And, what's more, it's delivered that ten year performance fairly steadily through the decade, rather than in a sudden boom-driven spike.
And despite the fact that the company's shares fell 12% on Monday when it announced its half-yearly results, I think its shares are a 'buy'. And so does Investec Securities, the company's house broker -- although I'm naturally cautious about the weight that should be attached to that. As my Foolish colleague Alan Oscroft noted recently, brokers' ratings are usually biased towards 'buy' recommendations.
So what does Carr's do -- and why do I think the company is worth buying into?
Founded in Carlisle in 1831, Carr's began life as a flour miller, and floated on the LSE in 1972. (Today, a company of its size would probably float on AIM -- but AIM wasn't an option back then.) Flour milling is still a business that it's in -- pop into your local Tesco or Sainsbury (LSE: SBRY) and you'll see its specialist bread flours on the shelves. Contract caterers and industrial bakeries are also large customers.
Branching out
Since then -- and mostly in the last 15 years -- Carr's has branched out into animal feeds, specialist steel fabrication for the nuclear decommissioning programme and oil and gas sectors, fertilisers, farm machinery and supplies, and food supplements for cattle, sheep, goats and horses. Recent acquisitions include a fuel distributor, and a company that sells ground care machinery. Many (but not all) of the businesses are centred on Carlisle, in Cumbria -- but there are subsidiaries and joint ventures in South Africa, Germany, and the USA.
To me, that's a reasonably diversified set of businesses, and one that's also reasonably recession proof. People and livestock have to eat, and farmers have to buy machinery and farm supplies. That said, a common thread running through many of its activities is of course agriculture, and the company's potted history makes especial mention of the outbreak of Foot and Mouth disease back in 2001, which affected Cumbria particularly badly. Thankfully, that kind of event is reasonably rare.
And without doubt, Carr's management understands how to make these businesses earn money and throw off cash. The dividend per share was 16 pence in 2005, 18 pence in 2006, 19 pence in 2007, and 23 pence in 2008 -- in all, dividends have grown by 16% per annum since 2001. The profit performance has been more erratic, but that's a feature of the markets that the company operates in: while reasonably recession-proof, agricultural prices follow commodity cycles.
The latest figures
Which brings us to Monday's half-yearly results. Revenues were up by 8%, but profits rose only by 2%, with strong trading in all divisions except fertilisers, where early buying by farmers seeking to avoid price increases had seen last year's sales boosted at the expense of this year's. The company also had to make a significant payment to top-up its employee pension scheme, further dragging down earnings.
Although the interim dividend would be maintained, the full year's profit would be lower this year than it was last year, said the board. On which news, as I've said, the shares fell 12%, to 395 pence.
At which point, I think they are in undoubted value territory. This is a company whose shares were trading at 700p in the middle of 2008 (at which point they'd outperformed the FTSE 100 by a whopping 650%, never mind the 375% performance at today's share price), and which subsequently followed the stockmarket down to a level of around 450p during what proved to be one of its most successful years ever, with revenues up by almost 50% and pre-tax profit more than doubling.
Is this year going to be as good? No. The board has said so. But -- and let's be totally blunt, here -- how many businesses are going to have a good year this year? Retailers? No. Property companies? No. Banks? Don't make me laugh. Manufacturers? Ditto.
My one concern is Carr’s size. At today's share price, it’s pretty much a micro cap, valued at just £37 million -- less than a tenth of last year's revenues. But I'm betting that the share price will resume its recent growth trajectory, and that it won't stay that low for long.
More from Malcolm Wheatley:
Of the companies mentioned, Malcolm Wheatley has shares in BP and GlaxoSmithKline.
