Croda International (LSE:CRDA) is a quality business, but its share price is down 62% from its 2021 highs. And the latest trading update looked ugly at first sight.
Beneath the surface, though, I think there’s reason for optimism. The firm’s life sciences division is still battling a post-Covid hangover, but there are encouraging signs elsewhere.
Company overview
Croda International is a chemicals company. Its products are used in various industries, including crop protection and beauty products, but a key part of the business is life sciences.
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The firm makes lipids that enable drugs to be absorbed in the right part of the body. And its products were used in the Pfizer Covid-19 vaccine, which naturally brought a big windfall.
Since then, though, vaccine demand has evaporated and manufacturers have excess inventories left over. As a result, sales in Croda’s life sciences division have stalled.
The situation has gone from unusually good to unusually bad – but investors might wonder how long this will last. At first sight, the latest results don’t look positive.
Declining sales?
Within Croda’s life sciences business, sales during the first six months of 2024 were 17.7% lower than during the last six months of 2023. That’s not a good sign.
Excluding £48m in lipid sales for Covid vaccines at the end of last year, sales are still down 2%. In other words, it’s not obvious a return to normality is imminent.
Furthermore, this is set to weigh on profits for the year. Despite other divisions showing growth, operating income is set to be lower than management previously expected.
That’s why the stock is falling. But the decline in overall revenues for the first six months of 2024 obscure an important fact – the company is actually growing.
Growth
Croda International generated £881m in revenues during the first half of 2023, which fell to £816m in the first half of 2024. That’s a 7% decline, but this was due to a weak first quarter this year.
Over the last three months, sales have reached £407.4m. That’s a 0.8% increase on the £404.2m recorded during the second quarter of 2023.
Even with the life sciences division struggling, the overall business is doing well. Investors might have to wait for this to show up at the bottom line, but this is a clear positive.
With the stock at a five-year low, signs of growth might look like a buying opportunity. But there’s one more thing investors should note.
A bargain?
The latest decline takes Croda’s market cap to £5.5bn. But in its best year – when Covid-19 sales were supercharging its life sciences division – the company made £189m in free cash.
That implies a 3.5% return at today’s prices, which I don’t think is particularly exciting. So at today’s prices, the company needs to do more than ever before to look like a bargain.
It might be that this is on the cards, with other parts of the business growing well. But it’s not entirely obvious that the stock is a bargain – even at its lowest level since 2017.
