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.
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.
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.