Shares in Associated British Foods (LSE: ABF) have slumped by around 8% over the past month, although it is not clear why investors have been selling the stock.
The company has not published a trading update since September 9 when it announced that trading expectations for the full-year were “unchanged” from previous updates.
With this being the case, after the stock’s recent decline, I reckon shares in Associated British Foods now look to be a bargain.
Diversified business
One of the things I like about it is that its founding family still owns around 50% of the company. This ownership allows the business to take a long-term view when making investments. Unlike so many other companies, management is willing to sacrifice short-term profitability for long-term investment.
It is this mentality that inspired the group to devote a portion of its earnings to the retail business. ABF originally started as a diversified agricultural products company, but in 1969 moved into low-cost fashion when it launched Primark.
This business has gone from strength to strength since its founding, and it does not look as if the group is planning to slow spending any time soon. A total of 1m sq ft of additional retail space is in the pipeline for next year, with 19 new stores planned across Europe and the UK.
Primark’s growth has helped the group ride out volatility at its agricultural business since inception. With the more predictable clothing business contributing to the bottom line, the group’s earnings per share have grown at an impressive 8% per annum on average since 2013.
The City does not expect this growth to come to an end in the near future. Analysts have pencilled in earnings per share growth of 4.2% for fiscal 2019, followed by growth of 8.5% for fiscal 2020. That might not seem like the fastest growth rate in the world, but for a company with revenues of nearly £16bn, it’s impressive.
Undervalued
Despite Associated British Foods’ diversified business, long-term focus, and impressive growth rate, the stock is currently dealing at a forward P/E of only 15.9. The ratio falls to 14.6 next year based on current City estimates.
Historically, the stock has commanded a P/E of at least 20, and on occasion, investors have been happy to pay as much as 35 times earnings to get their hands on the business.
I don’t think the stock is worth that much, but a P/E of 20 seems more appropriate. On that basis, I reckon shares in ABF are currently undervalued by around 20%.
On top of the attractive valuation, shares in the sugar-to-shirts business offer a dividend yield of 2.2%. Over the past six years, the payout has grown in line with earnings at a rate of 7.1% per annum. With the payout covered 2.9 times by earnings per share (based on estimated 2019 numbers), there’s also plenty of headroom for management to increase the payout in the years ahead.
That’s why I think it could be worth buying this FTSE 100 stalwart if you have £3,000 to invest today.
