Monday, 18 March 2013

Associated British Foods

Associated British Foods, ABF, agricultural and retail company
The seventh stock I bought was Associated British Foods. This company was a classic Peter Lynch buy. I all of a sudden discovered that people were standing around on the streets, in the U-bahn, in S-bahn with bags and bags filled with cloths. On the bag was written Primark. I therefore started digging to find out what kind of company this was and if it was possible to buy stocks there. Happily it was possible to do so! Associated British Foods is a fairly interesting company.

They divide themselves into five parts: Sugar, Agriculture, Grocery (today their biggest revenue source), Ingredients and Retail. All five parts are making a profit but to various degree and 2012 %-age wise sugar was the best performer. This was mainly due to that the cotton prices went up during last spring/summer which cut the profit increase of Retail otherwise I suspect that part would have been the best performer. I bought this company based on their Retail but also the other parts are healthy and doing well however I think that the biggest growth will in the future come through Retail and the other parts will have less and less impact of the total.
Primark represent something that I as a person despise because it is cheap, cheap and cheap. One colleague told me: "Why should I buy something at H&M when I get it for half the price in Primark and it has the same quality". This is really hitting the nail! Primark spends no money on commercials everything goes to decreasing the price. However... especially young people are happily showing up their Primark haul in YouTube Videos so Primark gets a lot of commercials but made on the cost of the customers for and by themselves. Very interesting phenomena. Back to the topic a little... I personally despise the buying and throwing away society. In this case I have bought things from Primark. Not only for supporting my own company but also to check on the quality and I must say that I am happily surprised of my 16 € jeans with a belt and my 1 € face-towel that I use for washing dishes so that I can easily wash it in the wash machine when it is too dirty.
What I like with Primark is that the only country where it is highly established is in the U.K. with over 200 stores. Lately they have started to enter a couple of markets with a few amount of stores. This means that they have a huge growth potential for Retail not only in Europe but also in the rest of the world. After being touch with their very friendly investor relations I found out that they buy the land where they place their stores just like McDonalds which is more about Real Estate than fast food which so many people think it is. Today McDonalds is probably the biggest Real Estate Agent in the world with all the franchises paying rent to them. The benefit is very clear that over time there is an increased property value and I hope the trend will be the same with my Associated British Foods.

I managed to buy 100 shares for around 16.75 € a piece. Back then it had a P/E of 28 which is admittedly fairly high and the P/B was 2.3 which is also off my charts but I felt that I had to adjust my set of rules for this growth stock. In the last six years they have gone from a revenue of 6.8 billion GBP to 12.25 billion GBP. So the company has a growth rate of 10.5% which gives a company P/E value according to the Grahams formula of 29.5.

I will sell this stock either when I see that people stop to go there to do their shopping or the P/E is above 60.

Oh, and one more excellent thing that I like... they only make half year reports! I wish more companies would go either to half year or why not even full year reports to seriously annoy all the speculators.

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