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Bunzl (LSE:BNZL) has an outstanding track record when it comes to growth. But shares in the UK distribution company have crashed almost 30% this year.
The main reason is a profits warning in April, but there are already signs the business is starting to recover. And that’s why I’m looking to add to my investment again in October.
What’s been going on?
Bunzl’s a distributor of non-food consumables, which means things like disposable tableware and carrier bags. And the company has grown into a powerful operation via a series of acquisitions.
This can be a risky approach, but the FTSE 100 company’s done very well. As a result, revenues have almost doubled over the last 10 years while earnings per share are up 113%.
Things however, hit a bump in April when a shift to own-brand products resulted in the loss of a major customer, creating pressure on both sales and margins. And tariff uncertainty didn’t help.
In a difficult environment, Bunzl paused its share buyback programme to focus on strengthening its balance sheet. But it looks as though things are starting to get back on track.
Back in business?
Even the best businesses go through difficult times. What sets the best ones apart though, is their ability to recover and keep moving forwards – and this seems to be the case with Bunzl.
The firm’s most acute problems have been mostly connected to its US operations. But the company’s making moves to address this and it expects to see improvements this year.
H1 operating margins were 6.6%, down from 8% last year. Management however, is expecting this to recover to almost 8% for the full year, which isn’t far below the 8.3% level achieved in 2024.
Free cash flows for 2025 are likely to be down on last year. But Bunzl’s already resumed its share buyback programme and with the stock where it is, I think that looks very interesting.
Long-term plans
The firm’s plan is to use around £700m to acquire other businesses. Investors are often suspicious of this as a growth strategy – and for good reasons – but not all deals are the same.
Acquisitions are riskiest when they’re either big (relative to the size of the buying company), or unconnected to the firm’s existing operations. But Bunzl has some advantages on both fronts.
A fragmented industry means the firm can find opportunities that don’t leave it overly exposed to any one deal. And it can focus on businesses that it can integrate into its existing network.
Even during a difficult six months, Bunzl announced deals in Spain and Mexico. But even if acquisition targets don’t present themselves, the company has a very attractive backup plan.
Buybacks
If the firm can’t find attractive acquisition targets, the intention is to return the £700m to investors via share buybacks. And at today’s prices, that’s a 9% return.
Given this, I think the stock looks cheap at the moment. So rather than evaluating Bunzl as a risky bet on future growth, I see it as an undervalued opportunity.
I’ve been steadily accumulating shares for a while now. And I’m happy to keep going in October.
