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Forget Tesco! I’d rather buy shares in this growing FTSE 250 company

Although Tesco is a well-known FTSE 100 name, I reckon its long-term growth prospects are limited. And the rapid gains from chief executive Dave Lewis’s turnaround have already been harvested by shareholders. Instead, I’d rather invest in Hilton Food Group (LSE: HFG), which is a growing FTSE 250 company that supplies Tesco with packaged meat products.

Good results

Today’s half-year results report reveals to us further progress with the trading figures. Compared to the equivalent period last year, and in terms of constant currency rates, revenue rose 6.5% and adjusted earnings per share moved 9% higher. The directors expressed their satisfaction with the firm’s progress by pushing up the interim dividend just over 7%.

It’s the kind of outcome we’ve become used to from Hilton Food. Over the past five years or so, revenue has increased by around 47%, earnings close to 60% and operating cash flow about 33%. That’s decent, defensive-looking and well-balanced growth to my eyes, and the directors have passed the firm’s success on to shareholders with an almost 70% lift in the dividend over the period.

But income isn’t the only way Hilton Food has proved to be a decent investment. The share price is almost 260% higher over the five-year timeframe, reflecting the underlying progress in operations and suggesting a valuation re-rating has occurred. At today’s share price close to 985p, the forward-looking price-to-earnings ratio for 2020 runs just above 20 and the anticipated dividend yield is a little below 2.5%.

Steady expansion

It’s not a bargain, for sure. But City analysts following the firm have pencilled in low double-digit advances in earnings for this year and next – the firm’s steady expansion grinds on, driven by initiatives to broaden the product offering with existing customers and to take on new customers selectively.

The management puts great emphasis on building long-term partner arrangements with its customers, which is one reason Hilton Food remains one of Tesco’s main suppliers some 25 years after the packaged meat supplier first established itself, initially to supply Tesco from its facility in Huntingdon, UK. Indeed, executive chairman Robert Watson said in today’s report: “In the UK we are now packing 100% of Tesco retail packed red meat.”

However, one risk shareholders face is that the company’s turnover is derived from just a handful of customers. So far, that risk hasn’t jumped up to bite it, but the loss of a big contract in the future can’t be ruled out. Nevertheless, I reckon the way the firm keeps ploughing investment into international operations across Europe makes it a strong partner for supermarket chains such as Tesco.

There’s no sign of any weakness in the growth trajectory of operations, and I think the firm’s expansion ambition is encouraging given its breadth and depth. At some point in the future, Hilton Food could grow enough to make its customer base look more diversified. Meanwhile, the share price chart shows consolidation, suggesting that the company could be growing into its valuation. I’m tempted by this stock.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.