Soaring pig prices threaten Cranswick

Pork producer Cranswick's (CWK) latest trading update - for the six months to the end of September - has revealed challenging times ahead. Rising animal feed costs, and the cost of implementing new EU regulations, is pushing down pig herd numbers and bolstering pig prices. UK pig prices are now at a three-year high and are set to rise further - meaning a potential threat to Cranswick's profit margins.

In response, Cranswick has initiated discussions with retailers in an attempt to recover its costs. There are reasons to be optimistic about Cranswick's prospects here. Not only has it successfully passed on costs to retailers in the past, but supply is one of the factors that's boosting prices and, as broker Investec points out: "While retailers are certainly pre-occupied with the price at which they sell their product, they are also fearful of empty shelves."

Operationally, Cranswick reported that half-year underlying sales had grown 5 per cent year on year. However, with first-quarter sales having risen by a rather heftier 7.4 per cent, it looks like the company suffered a fairly weak second quarter.

Peel Hunt says...

Hold. Second-quarter sales were disappointing with the dismal summer weather having impacted barbecue sales. More importantly, pig prices are on the rise and Cranswick's ability to recover price will determine the extent of any downgrades. The next six months are likely to be very challenging for the pork industry. In the longer term, Cranswick should gain share as competitors - particularly Vion - struggle. In the shorter term, however, we expect the shares to underperform. We have reduced our price target to 750p to highlight the risks. Expect adjusted pre-tax profit of £48m for the end of March 2013, giving adjusted EPS of 75.5p.

Investec Securities says...

Buy. Pig prices are now rising at a pace and Cranswick has initiated discussions with customers to recover the inflation it expects to incur in the second half. Supply constraints sit behind these increases, which could help focus retailers' minds around availability and not just price. Such uncertainties are weighing on the shares, leaving them trading at a discount to their usual rating. However, we are making no changes to current year EPS forecasts of 75.5p, nor to our target price of 920p. Half-year figures are due on 26 November, by which time there should be greater clarity. Cranswick remains well-placed to continue its progress once it gets through the challenges of the next few months.