There appear to be numerous buying opportunities in the FTSE 100 at present. Even though the index made substantial gains in 2019, a large number of constituents are still trading at levels that suggest the stocks could offer value and the potential for long-term returns.
Falling on hard times
Bunzl (LSE: BNZL) used to be a market darling, but the stock fell on hard times in spring 2019 when the company warned that profit margins and earnings would come in below expectation for the year.
However, after this decline, the stock appears to offer value. For the past decade, earnings per share have, on average, grown at a rate of 10% per annum as the company has pursued a buy-and-build strategy.
Over the past two decades, Bunzl has acquired 157 businesses around the world with an average purchase price of £20m. There’s no reason why management cannot continue with the strategy, as the global distribution market remains highly fragmented.
Bunzl has proven that it knows what it is doing when it comes to buying and integrating smaller businesses. The managers of these companies will want a reliable partner to take over their businesses. Bunzl has proven time and time again that it is that sort of partner. According to management, there are at least 1,000 possible acquisition targets for the firm. Therefore, the group has enough potential acquisitions to last it for the next 40 to 60 years.
The company’s acquisitions have helped support dividend growth for the past few decades. Its dividend has risen every year for several decades, and today the stock supports a yield of 2.5%. With a dividend cover ratio of 2.5 times, it can afford to grow its dividend further and use the cash generated from operations to pursue its growth strategy, just as it has been doing for the past few decades.
In 2019, the company acquired three businesses for a total spend of approximately £120m. The latest deal was for a safety and emergency response supplies business in Australia, which brought sales of £19m to Bunzl.
Continues to trade at a low valuation
Despite a recent recovery in the share price, the stock continues to trade at a low valuation. It has a price-to-earnings (P/E) ratio of 16.2, below the long-term average of 19, which suggests that the stock offers a wide margin of safety. As such, Bunzl’s total return prospects could be high.
With the demand for distribution and supply services unlikely to decline for the foreseeable future, Bunzl is well placed to capitalise on the growth of the market through a combination of organic expansion and acquisitions. Considering the stock’s low valuation compared to its average, now could be a good time for long-term investors to snap up a share in this business, as it gets ready for the next stage of growth.
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Rupert Hargreaves owns no 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.