Gamble of the week: More bangers for your buck

The demand for sausages is expected to keep rising in developing markets. Phil Oakley tips one small-cap set to profit.

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in Features

It's been a good year in general for Britain's medium-sized companies. The FTSE 250 index is up 26% this year, but some firms have not participated in this rally. Take sausage skin maker Devro, for example. Its shares have fallen by around 5% as it has been hampered by rising costs and subdued demand for sausages in some markets.

The stock market tends to fall out with companies when they go through a rough patch. But if the problems are temporary and can be fixed, the shares can recover.

I think that Devro might be one of these. A look under the bonnet suggests that it is a pretty decent business with a return on capital employed (ROCE) of 17% last year.

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Making sausage skins is very energy and labour intensive. This, along with a rising price of animal gut, has been a problem for Devro.

However, price increases are slowing down, while the company is investing in new manufacturing equipment in the Czech Republic and the US, which should lead to a big falls in unit costs over the next few years.

671-devro

Collagen is much more versatile, but can save customers a lot of money when making their sausages. Collagen accounts for around 8% of Devro's sales at the moment, but could become much bigger.

Devro's shares are not desperately cheap or expensive, trading on 14 times 2013 forecast profits, but could reward patient investors if profits recover. Meanwhile, a 3% dividend yield comfortably covered by profits and low debts should provide some comfort.

Verdict: buy at 288p

Phil Oakley

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.

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