At a P/E ratio of 22, this FTSE 100 stock still looks like a brilliant bargain to me

By FTSE 100 standards, Bunzl shares aren’t cheap. But Stephen Wright thinks the company compares favourably with some much more expensive US stocks.

| 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.

British flag, Big Ben, Houses of Parliament and British flag composition

Image source: Getty Images

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.

Over the last five years, the FTSE 100 is up 14%, compared to a 92% gain for the S&P 500. Even accounting for dividends, the UK index has underperformed its US counterpart.

Investors could be forgiven for thinking that the FTSE 100 isn’t a good place to look for stocks to buy. But I think that would be a mistake.

A brilliant business

One that stands out to me is Bunzl (LSE:BNZL). At a price-to-earnings (P/E) ratio of 22, the stock isn’t obviously cheap, but I think it compares favourably with some of the best from the US.

Take Google’s parent company Alphabet (NASDAQ:GOOG) as an example. The business generates $79bn in operating income using $127bn in fixed assets.

That’s a 62% return, which is a great result. Who wouldn’t want a business that earns $79bn per year with only a $127bn outlay for property, plant, and equipment?

Bunzl, though, earns an even better return. The company has £669m in fixed assets and generates £790m in operating income – a return of 118%.

In other words, Bunzl’s operating income is enough to replace all of its property, plant, and equipment every year and still have cash left over. I think that’s an incredibly good business.

Resiliency

Earning huge returns is a great thing. But it’s important that the business has the ability to fend off competitors to allow itself to earn that money for a long period of time.

Alphabet’s advantage comes from the amount of data it has on its users based on their search history. This gives the company the upper hand when it comes to targeted advertising.

Bunzl also stands apart from its competitors. The company is a collection of distribution businesses focused on consumables, such as dispoable cutlery, surgical masks, and carrier bags.

The firm’s big advantage is its size and scale. With a wide distribution network, Bunzl is typically able to provide a faster, cheaper, and more reliable distribution service than its competitors.

It’s worth noting that this advantage increases as the company gets bigger. Bunzl’s impressive business therefore becomes more difficult to disrupt as its network expands.

Growth

Growing through acquisitions can be a risky business. If a company like Bunzl overpays in buying another firm, it can be destructive to shareholder value.

It’s fair to say, though, that Bunzl has done an impressive job on this so far. Over the last decade, it has consistently achieved 7% annual revenue growth. 

This is the one area – in my view – where the company falls short of Alphabet, which has been blazing along at 16% per year. But there’s an issue with this that investors should keep in mind.

Alphabet’s size means growing at 16% per year will require a $86bn revenue increase five years from now. Generating that much additional revenue will be challenging for any business.

With Bunzl, a 7% annual gain is much more modest – five years from now, that would be an extra £1.1bn. That won’t be straightforward, but it does appear manageable.

A stock to buy?

Alphabet is one of the best businesses in the world, but I think Bunzl has a lot in common with it. Even at a P/E ratio of 22, I’d be happy to buy shares in the FTSE 100 company for my portfolio.

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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet and Bunzl Plc. 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

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

A FTSE 250 share I’d buy and aim to hold for 20 years!

This FTSE 250 share has soared more than 2,000% during the past decade. Our writer Royston Wild thinks it has…

Read more »

Bournemouth at night with a fireworks display from the pier
Investing Articles

3 heavily discounted UK shares to consider buying in November

These three UK shares have been dragged down and our writer believes they're trading below their true value as we…

Read more »