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UK packaging firm Macfarlane (LSE:MACF) saw its stock crash 21% yesterday (22 October) as the firm issued a profit warning. It recovered to finish the day down 19%, but that’s still a big move.
The move followed the sad news of the death of a worker in one of its factories and ongoing difficulties in its distribution business. But what should I make of it as an investor?
Tragedy
A 57-year-old worker having a fatal accident in a packaging factory is a tragedy. The full details aren’t yet clear and there’s going to be an investigation, but there’s no other word for it.
Operations at the facility were – obviously – suspended and Macfarlane is going to spend the rest of 2025 looking to stabilise that business. And that’s going to have a big impact on profits.
That’s a big part of why the stock has crashed. It might bounce back when things stabilise, but it would be cynical to look for an investment opportunity in that way right now.
There is, however, more to the story than just this. Macfarlane’s distribution business has been having a tough year and that’s something investors should be paying attention to.
Distribution
Around 85% of Macfarlane’s revenues come from its distribution business. This supplies cardboard boxes and the like to the e-commerce industry.
The company has been dealing with cost pressures and a difficult pricing environment in this part of its business for some time.
A series of acquisitions has given Macfarlane a broader presence across the UK, which helps a bit. Ultimately though, this isn’t a part of the firm of which I have a particularly positive view.
Given the UK’s energy prices and the recent pressures businesses have been facing, I think investors are right to being wary. But there’s something else I’m much more optimistic about.
Manufacturing
As well as distributing cardboard boxes, Macfarlane also manufactures bespoke products for shipping specific items. These are high-value and difficult to transport without breaking.
Unlike the distribution business, there’s a lot of competitive strength here. Its solutions are highly technical and involve working closely with customers, create lasting relationships.
As a result, margins are much higher. So despite the manufacturing business contributing 15% of Macfarlane’s revenues, it accounts for more than 25% of the firm’s operating income.
The customised solutions cost a fraction of the replacement value of the products they protect, but they’re critically important. And I think that’s a very good position to be in.
Long-term thinking
The tragedy at Macfarlane’s factory isn’t something investors should just ignore. Nor is it something they should look to use as a potential short-term opportunity.
I think, however, there’s a lot of long-term strength in the firm’s manufacturing business that’s being masked by current difficulties in distribution. And that’s worth taking seriously.
At today’s prices, I think the stock looks like a bargain. So if it’s still trading at these levels when I’m next in a position to buy, I’ll be looking to add to my investment.
