During the last couple of months, FTSE 100 stock Croda International (LSE:CRDA) is up 26%. But the share price is still well short of where it was at the start of 2023.
The company’s earnings have fallen sharply this year, largely due to excess inventory at its customers. But as this wears down, could the stock be set for a recovery in 2024?
Time for a recovery?
In general, 2023 hasn’t been a good year for Croda. All of the company’s operating units have struggled with the surge in demand during the pandemic falling away.
This has most notably been the case in its life sciences division, which makes lipids used in vaccines. According to Pfizer, demand for boosters has fallen from 70% in the US to around 20%.
Croda’s customers have therefore found themselves with excess inventory. As a result, sales have slowed and profits have fallen from £2.71 in 2022 to an estimated £1.65 this year.
Things aren’t likely to get back to their pandemic highs, but they probably won’t be as bad as this year again, either. So with the share price rising, is there a chance to buy the stock for a 2024 recovery?
Forecasts
Analysts don’t particularly think so. The average price target for Croda International in 2024 is around 3% higher than the current level of the stock.
For 2024, earnings per share are expected to be £1.75, rising to £2.04 and £2.15 over the next few years. I think this is plausible, especially with sales in the company’s beauty division already starting to recover.
The estimates represent steady progress without reaching the £2.50 and £2.71 per share levels of the pandemic. But the question for investors is whether or not the current share price implies something more.
According to the analysts at J.P. Morgan, it does. And I think they have point.
Valuation
Right now, Croda shares trade at a price-to-earnings (P/E) ratio of 36. That’s a high multiple for a FTSE 100 stock, but its earnings are unusually low at the moment.
If the company’s earnings come in as expected over the next few years, Croda should generate £5.94 in earnings per share. That’s an 11% return at today’s prices.
The company is also fairly capital intensive. With significant equipment to maintain, only around 50% of the cash the business generates becomes free cash available to shareholders.
As a result, I think the earnings estimates imply around a 6% return after three years, which isn’t particularly high. I’d therefore be looking for much more growth beyond this to justify an investment.
Should investors consider buying Croda International shares?
I think there’s a lot to like about Croda International. The firm has a strong balance sheet and its earnings are clearly likely to grow from here after an unusually difficult demand environment.
The trouble is, the current share price seems to recognise this. As a result, analysts are doubtful of a meaningful rally into 2024 and I don’t see the stock as an obvious bargain from a long-term perspective.
