Buying Cheap Carr's

Published in Company Comment on 17 July 2009

Short-term price fluctuations based on temporary bad news can present opportunities.

If safe, steady, and good yielding investments are what you're after, then Carr's Milling Industries (LSE: CRM) may well fit the bill.

Though definitely one for the long term investor, Carr's does put on a spurt from time to time, but at the moment it's at a relative low. In fact, Carr's is close to its lowest price for five years.

This fully-listed, Cumbria-based agriculture, food and engineering business has an enviable track record in steadily increasing profitability over the last decade or so, as pointed out by the appropriately-named Malcolm Wheatley, earlier this year. But fluctuations in the price of flour and, more recently, fertilizers, have hit profitability.

Uninspiring results

This relative low point has been reached after today's less than inspiring interim management statement which talks of "appreciably lower" profits than last year. This has knocked the price by almost 3% to 425p, valuing the group at a little over £37m. It's ironic, though, that we already knew of the worsened performance after last year which was exceptionally good. Today's news that the company is on-track to achieve market expectations of around £7.4m in pre-tax profit for the year after strong sales in food, agricultural machinery and supplies offset weakened markets for fertilizer and animal feed, is actually very good.

I see such short-term price fluctuations as being good opportunities to add to a quality long-term growth business in a defensive sector. We all have to eat after all, come what may! The bad news from April's interim results was already in the price in my opinion. News of weakness in Carr's fertilizer unit (the company has had to lower the price of its fertilizer to shift the stock) and an increased retirement benefit charge were the main culprits. Apparently, farmers bought earlier last year due to rising costs, and this year are postponing orders in the hope prices may fall.

Setting the bags of fertilizer aside for a moment, everything else was hunky-dory. In fact, first half sales were up 8% at £174.5m, whilst pre-tax profit increased 2% to £5.3m.

Temporary weakness

The fertilizer problem seems unlikely to be a problem again next year. Of course, there are other unforeseeables, but such is life for a company in the agricultural sector. And Carr's has an excellent record in delivering profits despite the various market setbacks that inevitably come its way. It has also demonstrated a commitment to maintaining a good yield. The 6p interim dividend has already been paid -- and if the final dividend from the last full year of 17p is maintained in August, that represents a yield of 5.4%.

Meanwhile, Carr's has net assets of over £35m and had total sales last year of £372.3m. As we now know, last year's profit figure ("a tremendously successful year") of £12.9m won't be matched this year due to the fertilizer problem. But consensus broker forecasts are still for £7.4m this year, rising to £10m (73.68p in earnings) for 2010. Of course, brokers' forecasts should be taken with a pinch of salt, though the £10m figure going forward certainly doesn't look crazily ambitious given past performance -- and if achieved, it places the shares on a forward price-to-earnings ratio (PER) of 5.8. This looks too low to me given the company's excellent track record, strong balance sheet and low price-to-sales ratio (PSR).

A stalwart

Carr's certainly doesn't offer a huge amount of excitement for thrill-seekers. And it will always experience fluctuations in the price of various commodities that will either benefit the bottom line or give it the odd knock. These are inevitable and shouldn't really concern the long-term investor. I see Carr's as a real stalwart of an investment; one to have and to hold -- and one that's surely better to buy on temporary weakness than on strength?

More share ideas from David Holding:

David owns shares in Carr's Milling Industries.

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