In the past year, chemicals’ company Croda International (LSE: CRDA) has seen a 41% increase in share price. But this is not its unique selling point. Impressive as that increase is, there are many FTSE 100 stocks showing high double-digit gains right now. This is because last year at this time the stock markets were still in a bit of a slump as a continued effect of the stock market crash in March 2020.
Strong long-term returns
Croda International’s real edge is in its long-term returns. If I had bought the share five years ago, I would have earned returns of 156%. Let us go further back in time. If I had invested in the FTSE 100 stock 10 years ago, my returns would have been over 260%. This basically translates into 26% returns on my investments every single year over the last 10 years.
Financials have weakened
But can it continue to deliver these returns?
This question comes to my mind when I look at its latest financials. Consider this. As per reported results, its sales barely grew in 2020 and its pre-tax profit declined by a whole 11%. Some of this is the pandemic’s impact on business. However, the trend over the past few years is not encouraging either. Its revenues have been flat and its net income has consistently dropped.
Acquisitions power the Croda International stock
Yet, I think there is much merit to the stock. I like that Croda International supplies to a range of industries, including beauty, pharmaceuticals, and automotives. And it is expanding across sectors too. It has recently acquired the French fragrances business Parfax, and has also agreed to acquire the French cosmetics company Alban Muller.
Last year it also bought Avanti Polar Lipids, which incidentally has a role to play in the delivery of the Pfizer–BioNTech Covid-19 vaccine. Being associated with finding a cure for coronavirus is a huge reputational win in my view. In fact, the company’s CEO, Steve Foots, has said that “My proudest moment in more than 30 years at Croda came with our critical involvement with the Pfizer-BioNTech COVID-19 vaccine…”.
And now, it expects to see increased sales because of this too. It expects recovery in general to support profitable growth as well. That said, it is only cautiously positive in its outlook for 2021 because of uncertainty surrounding segments like beauty and automotive.
Would I buy it?
There are both pros and cons to the Croda International stock. In terms of the pros, it is a financially healthy company that is diversified across a range of sectors that can keep it well insulated from fluctuations in the business cycle. It is also expanding effectively, as evident from its involvement in production of the Covid-19 vaccine. Incidentally, Goldman Sachs gave it a big thumbs up recently too.
But its financials have not been growing in recent years and some of its segments look weak, possibly because of a cyclical downturn. At the same time its share price has been rising pretty much consistently.
I still maintain that I would buy it for the long term. But I think returns could be somewhat lower than they have been in the past decade.
