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Why I’d buy this FTSE 100 stock now as its growth rate increases

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FTSE 100 stock Associated British Foods (LSE: ABF) has been attractive to me for some time. Last year, the valuation looked cheaper than it had for years because of the Covid crash. But the share price has made decent progress since my last article about the company in September 2020, rising from 2,067p to today’s level near 2,417p.

Growth is increasing for this FTSE 100 stock

I used to describe ABF as having a fast-growing clothing retail arm with its Primark business, balanced by the defensive and diversified Food business.

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However, today’s half-year results report has caused me to adjust my opinion. The retail arm is still growing fast between lockdowns, with plenty of ongoing potential to expand at home and abroad. But the Food business has also burst into growth with good prospects ahead.

So now I’m looking at the company as a FTSE 100 stock with decent growth potential right across its operations. And City analysts expect earnings to expand by almost 60% in the trading year to September 2022. If achieved, earnings per share that year of around 138p will be higher than the 134p or so posted for 2019.

Measured against that anticipated figure, the price-to-earnings multiple is just above 17. And I reckon the valuation looks fair for a business that’s just cranked up a gear with its growth rate. Perhaps higher annual growth figures will endure in the years ahead.

The report covers the period to 27 February. Adjusted operating profit from food operations was up by around 30% compared to the equivalent period the prior year. The division includes businesses in the areas of grocery, sugar, agriculture and ingredients.

Balancing that performance, the retail division under the Primark brand delivered a figure below prior expectations because of the recent lockdown. However, since reopening on 12 April, the stores in England and Wales have delivered record sales”.   

Short-term challenges, long-term potential

But overall revenue in the first half of the year dropped by 17% compared to the prior year. And adjusted operating profit plunged 46%. Most of the pain came from the lockdown of the Primark store estate.

However, the overall business coped well with cash under the circumstances. Around £860m flowed out in the period but the company usually sees a seasonal cash outflow in H1 because of the sugar business. Nonetheless, £650m was down to Primark.  

Things are getting better though. And the company has reinstated shareholder dividends. It also intends to pay back to the government some of its coronavirus support money.

Despite my long-term optimism, looking ahead, ABF expects a softer performance in the second half from the food division following an “exceptional” first half. And in Retail, the firm plans to open an additional nine Primark stores in the second half. Nevertheless, the directors expect retail profit in the current trading year to come in lower than last year.

It’s possible growth in overall earnings could fall back to lower levels in the years ahead. And if that happens the stock could struggle to make further progress. It could even fall if the valuation contracts. And I could end up losing money on my investment.

Nevertheless, I’m tempted to open a long-term position in the FTSE 100 stock now.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Associated British Foods. 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.

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