Forget Tesco! I’d rather buy shares in this growing FTSE 250 company

Why I’m tempted by this FTSE 250 (INDEXFTSE: MCX) company that looks like it’s growing into its valuation.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Although Tesco is a well-known FTSE 100 name, I reckon its long-term growth prospects are limited. And the rapid gains from chief executive Dave Lewis’s turnaround have already been harvested by shareholders. Instead, I’d rather invest in Hilton Food Group (LSE: HFG), which is a growing FTSE 250 company that supplies Tesco with packaged meat products.

Good results

Today’s half-year results report reveals to us further progress with the trading figures. Compared to the equivalent period last year, and in terms of constant currency rates, revenue rose 6.5% and adjusted earnings per share moved 9% higher. The directors expressed their satisfaction with the firm’s progress by pushing up the interim dividend just over 7%.

It’s the kind of outcome we’ve become used to from Hilton Food. Over the past five years or so, revenue has increased by around 47%, earnings close to 60% and operating cash flow about 33%. That’s decent, defensive-looking and well-balanced growth to my eyes, and the directors have passed the firm’s success on to shareholders with an almost 70% lift in the dividend over the period.

But income isn’t the only way Hilton Food has proved to be a decent investment. The share price is almost 260% higher over the five-year timeframe, reflecting the underlying progress in operations and suggesting a valuation re-rating has occurred. At today’s share price close to 985p, the forward-looking price-to-earnings ratio for 2020 runs just above 20 and the anticipated dividend yield is a little below 2.5%.

Steady expansion

It’s not a bargain, for sure. But City analysts following the firm have pencilled in low double-digit advances in earnings for this year and next – the firm’s steady expansion grinds on, driven by initiatives to broaden the product offering with existing customers and to take on new customers selectively.

The management puts great emphasis on building long-term partner arrangements with its customers, which is one reason Hilton Food remains one of Tesco’s main suppliers some 25 years after the packaged meat supplier first established itself, initially to supply Tesco from its facility in Huntingdon, UK. Indeed, executive chairman Robert Watson said in today’s report: “In the UK we are now packing 100% of Tesco retail packed red meat.”

However, one risk shareholders face is that the company’s turnover is derived from just a handful of customers. So far, that risk hasn’t jumped up to bite it, but the loss of a big contract in the future can’t be ruled out. Nevertheless, I reckon the way the firm keeps ploughing investment into international operations across Europe makes it a strong partner for supermarket chains such as Tesco.

There’s no sign of any weakness in the growth trajectory of operations, and I think the firm’s expansion ambition is encouraging given its breadth and depth. At some point in the future, Hilton Food could grow enough to make its customer base look more diversified. Meanwhile, the share price chart shows consolidation, suggesting that the company could be growing into its valuation. I’m tempted by this stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »