I have plans to initiate a position in regard to stocks mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Macfarlane (LSE: MACF) is an main market listed stock pursuing a growth strategy that has a current market capitalisation of £51 million. It has been on my radar due to the recent price drop from 50p down to 35p throughout 2014.
As of this article’s publication the current share price is offered at 42p.
2 Year Chart of Macfarlane
Clearly I’ve missed the lows at 35p as I was not paying enough attention so the question remains: is Macfarlane stock now to expensive to yield a large enough margin of safety?
Macfarlane Group PLC operates 3 leading UK based businesses in the packaging and labels sector.
From their corporate website:
Macfarlane Packaging Distribution
We are the UK market leader in the distribution of packaging consumable products to a wide cross-section of companies in the logistics, mail order, internet retail and industrial markets.
Macfarlane Packaging Design and Manufacture
Designs, manufactures and assembles bespoke packaging solutions for UK customers in markets such as electronics, aerospace and medical sectors where they require cost effective protection of high value products in both storage and transit.
Designs and prints self adhesive and resealable labels for FMCG customers in the UK, Europe and the USA.
Why a Margin Of Safety Exists
Macfarlane’s 30% share price decline seems to have been influenced by an interim management statement on 6 May 2014:
The increasingly competitive UK retail sector is impacting our Labels business, but we believe that our investments in sales resource and infrastructure will underpin a performance in our Manufacturing businesses broadly in line with that in 2013…
…our full year results will be more strongly influenced by performance in the second half of the year and our results for the first half of the year are likely to be below those achieved in 2013. Given the improvement in sales levels in 2014 to date and the actions being taken, the full year outlook remains in line with our expectations
Graeme Bissett, Chairman of Macfarlane Group
In effect the market has again overdone it’s assessment of Macfarlane’s prospects by over extending it’s own false negative view of the value of Macfarlane’s stock when you consider that in the same interim management statement Macfarlane announced:
- Group sales in the first four months of 2014 are 2.4% ahead of the same period in 2013
- Sales in Packaging Distribution are 2.5% ahead of 2013
- Sales in manufacturing operations are 1.8% ahead of 2013
What I like about current management is that they have been very open about the need to issue more shares as part of their growth strategy ‘which will be mostly dependent on our efforts to win new business in targeted sectors and through earnings-enhancing acquisitions’.
They have also been honest about paying down the pension deficit – currently £13.9 million.
Net debt has almost doubled from £5.9 million to £10.1 million due to two acquisitions which is part of Macfarlane’s growth strategy, the other part being to pursue organic growth.
Chairman Graeme Bissett in the final results released on 26 February 2015 thinks that this will translate into continued growth into 2015:
The acquisitions of Lane Packaging and Network Packaging have performed strongly and have been earnings-enhancing in 2014 and I look forward to seeing their full-year contributions feed through in 2015. The Board remains committed to seeking out further profitable expansion opportunities through carefully selected acquisitions. The positive sales trends seen in the final quarter of 2014 have continued into 2015 and the Group is well positioned for further growth in 2015
If Bissett is right and Macfarlane does not gorge itself on debt to fund growth then Macfarlane seems cheap even at today’s price of 42p when you consider the market cap is £51 million, they have positive earnings and pre tax profits are £5.6 million:
Macfarlane Financial Highlights
Long on the open Monday morning, price target: 50p.
Images: Yahoo Finance