The outlook for the UK economy is relatively uncertain at the present time. This year has seen various risks come to the fore, including slow progress in Brexit talks and a general election that has left a weak government. In response, consumer confidence has declined and caused the retail sector to experience a challenging period.
Against this backdrop, one FTSE 100 company could be worth buying. It may benefit from a decline in the prospects for consumer spending in the near term and in the long run, appears to have the diversity to post consistent profit growth.
Retail potential
The company in question is ABF (LSE: ABF). Associated British Foods’ Primark retail division accounts for 46% of its total revenue after exceptionally high growth in recent years. This means that while the stock is still diversified, its retail operations have a major impact on its overall performance.
With Primark focused on budget products that offer good value for money, it could see demand increase in the near term.
Consumer confidence in the UK has been negatively impacted by a higher rate of inflation. It currently stands at 3.1% and means that consumers now have falling disposable incomes in real terms. Since the uncertainty regarding Brexit could increase in the coming months, it would be unsurprising for sterling to come under pressure and for inflation to rise. As such, shoppers may trade down from more expensive stores to value outlets such as Primark.
Diverse business model
As well as the potential growth of Primark, ABF also has a diverse business model that could help to protect it against weakness in one or more of its divisions. It has exposure to sectors such as agriculture, sugar, ingredients and grocery. While sometimes their performance can be volatile depending on commodity prices, overall they create a business which has been able to deliver relatively consistent earnings growth in recent years.
The company also has exposure to markets outside of the UK. While Brexit could prove to be a positive change for the UK economy in the long run, in the short run it could cause significant disruption and uncertainty. This may benefit international stocks which could see their profitability improve due to positive currency translation adjustments.
Outlook for solid growth?
Looking ahead, ABF is expected to post a rise in its bottom line of 7% in the current financial year. While this is in line with the anticipated growth rate of the wider index, the company has a solid track record of earnings growth.
For example, in the last five years it has increased its bottom line at an annualised rate of 8%. This consistency could be an asset that investors become increasingly willing to pay for as uncertainty regarding the prospects for UK-focused companies may rise over the medium term. As such, now could be the perfect time to buy the stock for the long term.
