We explain the reasons why you need to put this superb business in your portfolio
Thursday 15 Feb 2018 Author: Lisa-Marie Janes

Chemicals firm Croda International (CRDA) is one of the highest quality companies on the stock market.

Sales and pre-tax profit have grown nearly every year over the past decade and it generates superior return on capital employed (ROCE) roughly in the 30% field. The latter is a measure of how well a company uses all its sources of long-term financing to generate a profit. We like to see sustained ROCE above 15%.

Croda pays a dividend and an estimated £492m net debt position at the start of 2018 is less than 10% of the company’s market value, so borrowings aren’t a major concern to us. Gross margins in the region of 38% are highly desirable.

DESERVES PREMIUM RATING

On paper this really is a superb business and exactly what you should desire in a stock. Understandably, investors are happy to pay a premium price to access these highly attractive characteristics – and so are we.

Croda trades on 23.2 times forecast earnings for 2018 which isn’t excessive if you consider how well the business is run and the superior returns it generates.

So why should you buy the shares today? We believe Croda is on track for an exciting year with a potential improvement in organic growth and possible special dividend could be on the horizon.

Berenberg analyst Rikin Patel believes the cash return news could accompany full year results on 27 February. Croda has teased it will return cash if leverage falls below 1 to 1.5 times, according to the analyst.

On his current forecasts, net debt/earnings before interest, tax, depreciation and amortisation should hit 0.9 times in the year to 31 December 2017.

We would instantly use any money from a special dividend to buy more shares in Croda.

WHAT DOES IT DO?

Croda creates and sells speciality chemicals for beauty products such as moisturisers, as well ingredients for lubricants. It also develops crop care products to help farmers achieve superior yields.

In 2016, the personal care division struggled on the back of slower export markets and lower demand, but sales growth improved in 2017.

Euromonitor forecasts c4% compound annual growth in premium care products between 2016 and 2021, versus c2% for mass market products, playing to Croda’s strengths.

Innovation is at the heart of Croda’s strategy, evident through several technology acquisitions in January to improve skincare applications and boost the performance technologies division.

Croda is expected to report £324m pre-tax profit at the forthcoming 2017 financial results (2016: £276m), according to Berenberg forecasts.

It reckons Croda will then lift pre-tax profit to £346m in 2018 and £379m in 2019. (LMJ)

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