Get greedy with Cranswick

The group's bosses said that third-quarter trading was strong, with underlying growth "well ahead of the prior year" and the likelihood is that this momentum has continued through to the year-end. Brokerage Shore Capital expects Cranswick to report revenue growth of nearly 20 per cent, strong profitability and earnings per share (EPS) growth of around 14 per cent. At the time of the results announcement in late May, we expect the numbers will have a positive impact on the share price, so we advise topping up your holding ahead of time.

What's most appealing about Cranswick is its business model, which runs the supply chain all the way from the farm to the supermarket shelf. The company has its own production sites and packaging and transport operations, and it breeds almost one in seven pigs it processes. This minimises its exposure to rising pig prices, which have now entered an inflationary cycle after a year or two of consistently falling. Of the pigs it rears itself, Cranswick can also pass their higher prices on to its customers through what it calls 'pricing matrixes', where renegotiations on long-term retail contracts are automatically triggered quarter by quarter. According to chief financial officer Mark Bottomley, this gives Cranswick greater clarity over its pricing and what it can expect to charge its customers.

Despite that, Cranswick still has to recover higher costs of its own, as it buys in most of its animals from farmers and other breeders. Thankfully, for now, higher volumes and efficiency measures made across the business have helped offset much of the burden, although analysts think there could be a time lag before these cost recoveries show up financially. That, along with more stable pork prices in the fourth quarter, could lead to some short-term pressure on profit margins in the second half of the year just ended. That said, analysts still expect operating profits to grow more than 5 per cent year on year.

Financially, Cranswick is in good shape, too. One consequence of operating a vertically integrated model is heavy investment, so it's not surprising to see management indicating that capital spending will have hit £50m in 2016-17, compared with £34m the year before. That will bring net debt up to around £10m, compared with just £2.9m at the end of September. However, that still only equates to a leverage ratio of just 0.1 times cash profits and will be about 2.5 per cent of shareholders' funds. In the third quarter, Cranswick also announced the re-financing of its banking facility on more favourable terms, which now runs up to November 2021. This, combined with the company's strong cash flow, should provide plenty of headroom to fund future growth and perhaps more acquisitions.

Acquisitions have been another feather in Cranswick's cap. Last April it bought East Anglia-based Crown Chicken as part of a £40m deal to expand its foray into poultry. Crown's sales grew 8 per cent on the year in the first five months of Cranswick's ownership and the deal will help diversify Cranswick's revenues. It also bought a pork processing business in Northern Ireland last November, increasing capacity by around 10,000 pigs. Cranswick hasn't been shy about disposals either. It offloaded its sandwich business - The Sandwich Factory - to Greencore (GNC) in July, netting £16m in the process.