Is Now the Time to Buy Associated British Foods?
Feb 4th 2013 12:16PM
Updated Feb 4th 2013 1:25PM
LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at Associated British Foods to determine whether you should consider buying the shares at 1,745 pence.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
So let's look at the numbers:
|Stock||Price||3-Yr. EPS Growth||Projected P/E||PEG||Yield||3-Yr. Dividend Growth||Dividend Cover|
|Associated British Foods (ABF)||1,745 pence||75%||18.3||2||1.6%||20%||3|
Trading on a projected P/E of 18.3, ABF appears more expensive than its peers in the Food Producers sector, which are currently trading on an average P/E of around 11. ABF's relatively high P/E and high double-digit growth rate give a PEG ratio of around 2, which implies the share price is slightly overpriced for the near-term earnings growth the firm is expected to produce.
Unfortunately, ABF's 1.6% dividend yield is about half of the Food Producers sector average, which is 2.8%. That said, ABF does have a three-year compounded dividend growth rate of 20%, implying the yield could soon catch up to that of its peers.
Furthermore, the dividend is three times covered, giving ABF plenty room for further payout growth.
Historic growth is strong, but will it continue?
As I say, ABF's historic growth has been really strong, and I believe this trend is set to continue. Indeed, within the group's interim results released only two weeks ago, ABF reported continuing growth across most of its divisions and aggregate group revenue was up 10% for the period.
In particular, ABF announced that its retail division, led by high street chain Primark, saw revenues grow 25%. I believe this strong growth was down to new store openings and a larger number of products in store.
In addition, ABF also saw strong growth in its sugar division, which saw revenues up 12%.
Despite these impressive growth figures, there could be some trouble ahead for the group. You see, ABF benefited from favorable commodity prices over 2012. However, I believe commodity prices could move against the group in 2013. For example, the price of sugar is currently at two-year lows, which could squeeze margins for the group's sugar business.
On the other hand, cotton prices remain near five-year lows, thus improving the outlook for Primark.
So overall, despite ABF's historic growth and future prospects I believe the company's current valuation is too high. With that in mind, I believe now does not look to be a good time to buy Associated British Foods at 1,745 pence.
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
The article Is Now the Time to Buy Associated British Foods? originally appeared on Fool.com.Rupert Hargreaves does not own any share mentioned in this article. The Motley Fool recommends Associated British Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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