I’d wager that Croda International (LSE: CRDA) shares will one day return to 10,000p.
The stock’s around 5,860p, as I write. The company just released its half-year results for the period ended 30 June. And at first glance, they look dire.
But hold that thought right there! Before clicking away to examine the next company’s financials, let’s set today’s news from Croda in context.
Strong quality indicators
The life sciences and consumer care company is a quality operator. And I reckon it’s the kind of business that might interest billionaire US investor Warren Buffett.
For example, the operating margin has been running above 38%. And the return on capital is a hefty 25%, or so.
On top of that, the multi-year record of cash flow and shareholder dividends has been robust.
These are all quality indicators that can’t be ignored. And they haven’t been. The company’s fine attributes are well known in the investment community. And that has led to a valuation that matches.
Indeed, Croda has looked expensive for a long time, and there’s some risk in that situation. But my view is that higher ratings can be a quality mark for businesses that have attractive characteristics.
However, Buffett rarely buys a stock just because the business is of high quality with decent forward-looking growth prospects. He looks for those things, for sure. But when he’s identified them, he tends to wait.
Then he pounces on quality stocks when they’ve been marked down by the market because of temporary operating problems. Or when they’ve been dragged down by some other factor such as a general economic downturn.
Why I’d consider Croda now
That’s exactly the type of situation we could be seeing with Croda now. The company just reported double-digit percentage drops for sales and profits. And the net debt position rose by just over 5%.
So what’s been going on in the business?
Chief executive Steve Foots added some detail. The speed and scale of post-Covid stocking and subsequent destocking among Croda’s customers has been unprecedented, Foots said. And that led to a decline in first half sales volume and also impacted the profit margin.
But there were pockets of decent performance in the business despite the difficult trading environment. The Consumer Care category delivered “sequential improvement” compared to the second half of 2022.
And excluding the impact of Covid-19 lipid sales in the prior period, the company also saw growth across all areas of the Life Sciences category. However, because of low order visibility, the firm is taking “some actions” to protect profitability ahead of conditions returning to normal.
But despite the hopefully short-term challenges, Croda is continuing to invest for future growth. And Foots said the opportunities ahead “remain very exciting” for the business.
As with any enterprise, operational challenges can last longer than expected. And the business may deteriorate further, taking the stock lower still.
Nevertheless, the share price is more than 40% below the peak it achieved at the end of 2021. And I reckon this is a great time to dig in with further research and consider the stock as a potential Buffett-style addition to a diversified long-term portfolio.
