US Edition Croda
497¼p –7¾p
Questor says BUY
Shares in specialist chemicals group Croda have added 28pc since Questor recommended the company as a good defensive play on December 8 – but there could be more gains to come.
Despite the recent rally, Questor remains cautious about global markets – and still favours a defensive core strategy with some exposure to deleveraging.
The earnings season kicked off after the US market closed on Monday, with aluminium giant Alcoa, but next week sees numbers from banking giants Citigroup and Bank of America, which are expected to be grim. There could be downside risk to markets on both sides of the Atlantic as company after company confesses to a dire performance in the last three months of 2008.
Some commentators and analysts are more confident: on Monday, Credit Suisse said in a note to clients that there was a 55pc chance that November last year saw the low in equity markets. However, it did concede that we would not see a normal bull market until the structural issues of deleveraging were more complete.
The broker also said that, if this was merely a bear market rally, it still saw another 10pc-20pc of upside. Credit Suisse pointed out that, in Japan in the 1990s, there were three bear market rallies, with each producing gains of 50pc-60pc. Questor suspects the bear is not quite dead yet – and believes that shares in Croda are still a defensive buy.
The group manufactures chemicals for the health care sector, the cosmetic industry and crop care products that are used in herbicides and insecticides. Its other products include lubricants for the oil and gas industry, solutions to help in textile processing and polymers for plastics and packaging, plus
many more.
Significantly, the company itself owns the intellectual property for a large number of its formulations. It also supplies ingredients for the high-end cosmetics sold by luxury brands such as Chanel and Estée Lauder. "We appeal to two things that will never go away – vanity and ageing," Croda chief executive Mike Humphrey said after its last results statement.
Around 90pc of group earnings come from its consumer care operations, mostly low-ticket defensive items. Its industrial products cover a wide range of sectors, which should provide some earnings protection – although total volumes are likely to fall.
The currency markets have also moved in the company's favour – so this should help boost full-year numbers, which are expected to be released on February 17.
The UK contributes less than 10pc to total sales, with around 50pc coming from Europe and 25pc from the Americas.
The group is also very cash generative, with free cash flow in the first half of 2008 jumping to £63.9m – 132pc ahead of the first half of 2007.
Questor also likes dividends – and Croda's payout looks pretty secure. With the company ticking all the right investment boxes, Croda shares are a buy, despite the rally in the stock since Questor first recommended a long position. The shares have come off their recent high of 558½p, so now looks like a good time to enter into a position.
Dignity
611p Unchanged
Questor says HOLD
In 1789, Benjamin Franklin
wrote a letter to French physicist Jean Baptiste Leroy about the brand-new American constitution. In it he said: "Our Constitution is in actual operation. Everything appears to promise that it will last, but in this world nothing is certain but death and taxes."
More than 200 years later, the US constitution is still going strong – and death and taxes are still a certainty. That's why shares in Dignity, the UK's only listed funeral operator, have proved to be some of the most defensive around.
The company's last trading update was in November, in which it said spending on funerals has increased despite the credit crisis.
Of course, no company is immune from the current turmoil, but this company should fare pretty well. Significantly, the group has said that it has not seen any deterioration in the more discretionary elements of its sales.
There is the company's debt to consider. The group has net debt of around £230m compared with its market cap of £387m. However, the debt profile of the group is relatively conservative.
The company's bonds are fixed at an average 6.7pc interest and are only due to be repaid in 2031. This implied the company will not have to come back to the market for a cash call to service these obligations.
On Tuesday this week, the company said it had appointed two independent non-executive directors, both of whom look like good appointments.
Ishbel Macpherson, who is also a non-executive Director of Mitie and Game Group, and Alan McWalter who has previously been a marketing director of Marks & Spencer.
Questor first recommended
the shares in March 2006 at 463¾p and they have added around 31pc since then. The stance was downgraded to a hold in September 2007.
The company's update in November provided Questor with confidence that consensus forecasts will be met. Trading at 16 times current-year earnings and with some analysts mooting the possibility of a special dividend in late 2009, the shares are definitely worth holding. However, at this time Questor thinks the valuation is too rich to be rated a buy.