Shares of Primark-owner Associated British Foods(LSE: ABF) rose as much as 5.9% to 3,095p — a new high for the year — after it released a positive trading update this morning.
Ahead of the update, the City consensus earnings forecast was 123p a share for the FTSE 100 group’s financial year ending 30 September. I reckon we can upgrade that to 125p after management said today that a stronger profit delivery than expected from Primark in Q3 "has marginally improved our group outlook for the full year."
Nevertheless, based on 125p earnings and a slightly lower share price (it’s eased back to 3,000p, as I’m writing), conventional wisdom would say that the resulting price-to earnings (P/E) ratio of 24 still leaves the shares looking expensive. However, they’ve traded higher in the past — an all-time peak of 3,600p in December 2015 — and I believe they can surpass this high-water mark in the next few years.
Primark powers on
ABF said today that sales in the year-to-date at its biggest growth engine, Primark, were 13% ahead of last year at constant currency (15% ahead in the last 16 weeks) and 21% ahead at actual exchange rates. This helped drive group sales up 10% at constant currency and 20% at actual exchange rates.
Primark has a huge growth opportunity, with expansion in Europe continuing apace and its more recent entry into the US already looking highly promising. But it’s not all about Primark. The conglomerate’s other businesses have their parts to play.
In particular, ABF’s sugar business should contribute significant profits with the sweet stuff emerging from a period of weakness in world prices. Back in 2012, the division contributed £510m operating profit compared with £567m for the rest of the group. By last year, the contribution from sugar had fallen to just £34m. However, with higher prices, the business contributed £123m in the first half of this year alone.
With Primark’s long growth runway, sugar in a sweetening spot and ABF’s other divisions — grocery, agriculture and ingredients — being solid, defensive businesses, I believe the shares are actually a better buy than many stocks trading on lower P/E multiples.
Accelerating delivery of value
Blue-chip consumer goods giant Unilever (LSE: ULVR) is another company I consider worth buying today, despite being on a relatively high P/E. The multiple is 22, based on a current share price of around 4,100p and a City consensus earnings forecast of 187p a share.
Unilever rejected a 4,000p a share bid from Warren Buffett-backed Kraft Heinz earlier this year. The Footsie group’s management has now taken steps "to accelerate delivery of value for the benefit of our shareholders." These convince me that the shares continue to offer good value, despite having risen above the level at which the US giant pitched its bid.
The steps include upping leverage and a £4.4bn share buy-back and 12% dividend increase this year (giving a forecast yield of 3%). The company is also to exit its Spreads business and is targeting a group operating margin of 20% by 2020.
Due to these developments, I believe Unilever’s premium P/E is more than justified by the prospects for accelerated earnings and dividend growth.
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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.