Bunzl‘s (LSE:BNZL) set to issue a trading statement on Tuesday (24 June). And the last time the FTSE 100 company did this, the results were dramatic.
The stock fell 25% when the firm released its Q1 results in April. So I think it’s worth paying close attention to both the business and the stock in the coming week.
Profit warning(s)
Bunzl’s Q1 update essentially amounted to a profit warning. And according to conventional stock market wisdom, these things are rarely isolated incidents.
The firm reported weakness in both revenue and margins, especially in its North American business. Part of this is due to the macroeconomic environment, but not all of it.
Bunzl’s been attempting to shift its business in two major ways. One is by centralising its sales operation and the other has involved attempting to focus more on own-brand products.
Neither has been a success in the short term and has resulted in the loss of a major customer. But the question for investors now is whether there’s more bad news to come.
Could things get worse?
Bunzl’s also announced an action plan to try and resolve its US issues quickly. But this might be ambitious and losing a major customer might not be reversible in the short term. That means there’s absolutely scope for the upcoming trading update to reveal more bad news. But the company’s been decisive in its moves to try and limit the damage.
In light of the macroeconomic uncertainty in the US, Bunzl’s changed its capital allocation priorities. The firm’s paused its share buyback programme to focus on its balance sheet.
That generally isn’t an encouraging sign for investors, but it might prove to be a good one. In general, I prefer it when companies err on the side of caution when it comes to resilience.
Long-term growth
Despite the recent difficulties, I think the stock’s one to keep an eye on. More specifically, I’m impressed by the firm’s long-term growth prospects.
Bunzl has an outstanding record of growing through acquisitions. This can be risky, but the company has a key advantage when it comes to limiting the inherent danger.
In general, buying businesses is most risky when the acquisitions are large and unrelated to a firm’s existing operations. But the industry Bunzl operates in is highly fragmented.
This gives the company more opportunities to identify relatively low-risk targets. And management thinks it still has a strong pipeline ahead in terms of future growth.
Outlook
I’m still firmly of the view that Bunzl’s fundamentally a very good business that’s facing a number of challenges at the moment. Some of these are of its own making.
I do think however, that these are temporary. But the market seems to have other ideas and is pricing the stock as though the company has a permanent problem.
If I’m right, then Bunzl could well be one to keep an eye on. And this week’s trading update should give investors a chance to get a clearer picture.
