4 Reasons To Still Love Croda International Plc

Champion Shares PRO’s lead advisor Nathan Parmelee believes Croda International Plc (LON:CRDA) can return to growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After rising more than 50% in less than two years, shares of specialty chemicals dynamo Croda (LSE: CRDA) have pulled back and taken a breather since April. The concern is that growth is slowing and might not return as revenue growth has hovered around 3% the last two years.

Determining Croda’s future growth trajectory isn’t a simple matter, because its expansion depends on innovation and Croda is tight-lipped about the products in development for customers. This is understandable as Croda’s specialty is developing the ingredients that allow Unilever, Estee Lauder and others the ability to claim on the label that their products make our hair and skin healthier, smoother, or stronger.

Despite the difficulty in gathering specifics, I believe there’s enough evidence we’re looking at a lull in Croda’s sales growth and not a permanent slowdown. Here are four reasons that support this thinking:

Higher-quality results

While Croda’s sales growth has slowed, the quality of those sales has improved and Croda’s margins have expanded accordingly. This has allowed operating profit growth to significantly outpace revenues as Croda improved the mix of products it sells and held operating costs stable. So while investors have been disappointed by the company’s sales figures, there has been little to complain about on the bottom line and Croda has reinvested much of the profit in the business.

Crop care will come back

Most of Croda’s Consumer Care sales are to the beauty and personal care industries, but crop care is about half of its remaining consumer care sales. A significant portion of these sales is for fungicides and demand has been lacklustre because of drought conditions in many parts of the world entering this year.  

In its half-year results, Croda noted there are signs the trend is beginning to reverse — and logically that makes sense, as the US has seen its drought conditions replaced with ample rain. Plus anything that improves yield at a reasonable cost is well positioned, though competitive threats from BASF and others must always be considered.

Europe showing signs of strength

Nearly 40% of Croda’s sales are in Europe and most of those are outside of the UK. While many of these sales are to personal care customers that then sell their products globally, another sizeable portion are for sealants and lubricants for new vehicles. This week, Europe posted better-than-expected GDP growth, and there is a buzz in economic circles that Europe may be turning the corner. If this is the case, it is a clear positive for Croda sales potential.

Investing for growth

In the past year, the company has made three small acquisitions that should see a boost from additional new product development and the benefit of Croda’s global sales force and customer relationships. Croda also isn’t shy about investing to expand into new regions or products where it sees opportunity.

A growth story again?

At 19-times earnings Croda’s shares fetch multiples similar to those of its customers in the cosmetic and personal care industries. That’s not entirely unreasonable, because the predictability of their sales flows through to Croda. Still, that’s not a bargain multiple so a healthy return on the shares likely depends on growth ticking up. I’ve laid out my reasons why I believe it will. What’s your take?

If you’re looking for other reliable companies in the FTSE 100, though, I recommend the special FREE report from The Motley Fool, updated for 2013, Eight Shares Held By Britain’s Super Investor

The report contains the names of the defensive shares favoured by Neil Woodford, whose track record speaks for itself, having beaten the Footsie by 200%-plus during the 15 years to October 2012 with a collection of dependable, blue-chip names. Simply click here to have your copy delivered immediately to your inbox, absolutely free of charge.

> Nathan does not own shares of any company mentioned in this article. The Motley Fool has recommended shares in Unilever.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Company Comment

Hand of person putting wood cube block with word VALUE on wooden table
Company Comment

Value has been building behind the Diageo share price

Despite the business growing, the Diageo share price first reached its current level just over 19 months ago and hasn't…

Read more »

Older couple walking in park
Investing Articles

5 stocks to buy for high and rising dividend income

I can see a host of shares to buy on the FTSE 100 offering me exceptional levels of income. Here…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I don’t care if FTSE 100 shares fall further, I’m buying them today

I'm happy to go shopping for FTSE 100 shares today, even though I accept that they could have further to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Rolls-Royce shares are down 18% in a month and I’m finally going to buy them

Investors who bought Rolls-Royce shares have been repeatedly disappointed, but I'm willing to take a chance on them before they…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

How I’d invest £10k in a Stocks and Shares ISA today

Now looks like a good time to buy cheap FTSE 100 shares inside a Stocks and Shares ISA. These are…

Read more »

Black father holding daughter in a field of cows
Investing Articles

Today’s financial crisis is the perfect moment to buy cheap shares

I'm building a portfolio of FTSE 100 stocks by purchasing cheap shares whenever I see an opportunity. There's a good…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

I’d buy Tesco shares in October to bag their 5.4% yield 

Tesco shares have fallen lately but I think this makes them attractively valued for a dividend stock I would aim…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I would do anything to hold Diageo in my portfolio (but I won’t do that)

Diageo is one of my favourite stocks on the entire FTSE 100 and I'd love to hold it, but one…

Read more »