International distribution and outsourcing group Bunzl (LSE: BNZL) is one of my favourite FTSE 100 unsung heroes but lately it has shown feet of lead, as heroes often do given time. Its share price is down around 15% over the past six months, yet I would still choose it over another clod-footed FTSE 100 hero, pharmaceutical behemoth GlaxoSmithKline (LSE: GSK).
Torn package
Bunzl’s struggles date back to May, amid concerns about narrowing core margins and declining returns, its move into more cyclical markets and the growing environmental war on non-recyclable single-use products. This morning Bunzl updated the market prior to entering its close period, and assured investors that overall trading is consistent with expectations at October’s Q3 trading statement. Group revenue for the year is expected to rise around 15% at actual exchange rates this year, or between 9% and 10% at constant rates, driven by organic revenue and the impact of acquisitions.
“The growth in organic revenue is principally due to the previously announced additional business won, albeit at lower margins, in North America towards the end of 2016,” it said. Management is keen to consolidate the group’s fragmented markets through acquisitions, and today announced its purchase of Lightning Packaging in the UK, which has annual revenue of £14m.
Margins call
Bunzl is still busy on the M&A front, announcing a record £600m acquisition spend which thrashes its previous high of £327m in 2015, and an active pipeline for acquisitions. The share price is down 1.17% this morning as investors cool on its aggressive acquisitions strategy if it comes at the price of tighter margins. Bunzl still isn’t cheap, trading at 18.4 times earnings, but it is cheaper than the last time I looked at the stock in July, when it topped 21 times earnings.
City analysts reckon the £6.81bn firm can still increase earnings per share (EPS) by 7% this year and 5% in 2018. It may only yield 2.2% but that is covered 2.5 times and management policy is progressive.
Whatever happen to Glaxo? There was a time when everybody loved it, but it is hard to keep the spark alive with the share price trading lower than five years ago, and with the FTSE 100 up 27% over the same period. The yield is still a dizzying 6.13% but that is partly due to poor share price performance, with the payout frozen at 80p in 2014, 2015 and 2016. City analysts expect the freeze to continue through 2017 and 2018, with future payouts dependent on improved free cash flow.
Dreamm-1 on
It all comes down to the pipeline and there has been some good news this month, with US regulatory approval for a first targeted treatment for eosinophilic granulomatosis with polyangiitis (EGPA), and promising data from its Dreamm-1 Blood Cancer study. It will need plenty more to drive a share price and dividend revival.
City analysts suggest a bumpy ride, with 8% forecast EPS growth in 2017 then a disappointing 3% drop in 2018. What would really hurt is a cut in the dividend, which cannot be ruled out, given cover of just 1.3 and CEO Emma Walmsley’s cautious recent pronouncements. Glaxo is notably cheaper at just 11.6 times earnings, but Bunzl looks the more complete package.
