Bunzl: boring is good for business
Food-service distribution company Bunzl is not a terribly exciting business, but it looks cheap and could be a great investment, says Rupert Hargreaves
The market is always looking for the next big investment theme, but more often than not, the best investments are those companies that work tirelessly in the background and earn steady returns year after year.
FTSE 100 group Bunzl (LSE: BNZL) is the perfect example.
A global force in the industry
Bunzl is the only global player in the non-food consumable space. It delivers things such as coffee stirrers, cleaning fluids and paper cups – hardly the sort of goods that are likely to get the pulse racing.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Still, while these are everyday items we take for granted, they are essential for many businesses. If they’re not delivered on time, it can cause headaches. The very nature of the non-food consumable supply business means Bunzl has a competitive advantage.
Most organisations don’t want to spend time and effort dealing with a range of small suppliers to deliver menial things like cutlery.
What’s more, these are products that are generally cheaper if bought in bulk, but most small businesses cannot buy these goods from suppliers in the sort of volumes required to keep the cost down. Bunzl can, and it’s a one-stop shop for companies that want to order a range of products without having to pay over the odds from a host of different suppliers.
As you might imagine, markets for these goods are quite competitive and while small businesses might not have the time and effort to chase suppliers to keep the cost down, there will be a certain price point at which doing the work themselves will make more sense. Therefore, profit margins in the non-food consumable space tend to be quite thin, which is another reason why Bunzl has been able to succeed.
Its size means the group has substantial economies of scale and these economies are only increasing as the corporation snaps up smaller companies to bring into the fold.
The group is building its footprint through acquisitions
Acquisitions are a core part of Bunzl’s growth strategy. Since 2004, it has spent over £4bn on deals, mostly smaller outfits. And it doesn’t look as if the company is going to run out of opportunities any time soon, as management has identified hundreds of further acquisitions in the highly fragmented global distribution market.
This strategy makes a lot of sense for the company. Its size means it can take over small organisations and remove unnecessary costs, such as accounting and marketing, improve margins and potentially cut costs for consumers. By streamlining the business and keeping costs low, Bunzl can increase the moat around its product further and reduce the payback time for the deal.
Bunzl’s latest trading update shows the business is on-track
Management believes revenue in the first half of the company‘s financial year will rise by 16% at actual exchange rates, with inflation and acquisitions driving underlying growth.
Earlier this month, Bunzl announced that it had acquired a cleaning and hygiene business in Germany and a healthcare business in New Zealand. The two acquisitions bring a combined £151m in extra revenue.
The fact that Bunzl is expecting double-digit revenue growth this year is impressive. It’s even more notable that the firm believes its operating margin will be “slightly higher than historical levels.” That suggests Bunzl is succeeding in passing higher costs onto customers.
That’s a testament to the group‘s business model. It shows that it is providing something customers want and that they are willing to pay higher prices. Not all organisations in the sector will be so lucky, and that could lead to further opportunities for the group. Smaller businesses might decide to give up and managers might start to turn to Bunzl to buy them out.
The stock looks cheap compared to its history
All in all, Bunzl is not a terribly exciting business, but that’s why I think this company could be such a great investment. It fulfils a vital service for businesses around the world and its competitive advantages are only growing.
Today the stock is selling at a forward price to earnings (p/e) ratio of 16.3 according to Refinitiv analyst estimates. That’s below the five-year average of 17.4. The shares also offer a dividend yield of 2.3%.
Considering the company’s competitive advantages and growth potential, I think the market’s view of Bunzl is far too pessimistic. With the stock trading below its five-year average valuation, there could be an opportunity for investors here.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert has written for many UK and international publications including the Motley Fool, Gurufocus and ValueWalk, aimed at a range of readers; from the first timers to experienced high-net-worth individuals. Rupert has also founded and managed several businesses, including the New York-based hedge fund newsletter, Hidden Value Stocks. He has written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
-
8 of the best properties for sale near ski slopes
The best properties for sale near ski slopes – from a luxury cabin in Geilo, one of Norway’s premier ski resorts, to a large chalet in Valais, Switzerland
By Natasha Langan Published
-
Cash hoarders take total UK savings to £2 trillion – why aren’t we investing?
Investment-shy Brits are hoarding huge amounts of cash in their savings accounts. We look at the case for saving versus investing.
By Katie Williams Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated