Earnings: why Associated British Foods shares are climbing

From the low point of 2022, Related British food (LSE: ABF) shares have put in one of the best performances in FTSE 100. Since the beginning of October, we have seen a 50% gain.

Stocks are still down from pre-pandemic levels. So should the recovery go further? A trading update released on Tuesday sheds some light on the question.

Rising sales

Revenue received in the board in the 16 weeks to January 7, 2023, up 20% on the same period a year ago. That is in real terms, with a 16% increase in constant currency due to the strength of the US dollar.

This all has to do with the company’s expectations of significant sales growth within a year. On the downside, adjusted operating profit and earnings per share are still expected to decline this year.

It can be difficult to deal with Associated British Foods as a whole company, as they are two businesses of the same size. There’s Primark. And there’s all the food.

Double reverse

Traditionally, the split has provided welcome security. The budget fashion business can be fickle, and carries the risk of trends moving elsewhere. And when the high street is hit by Covid, the grocery, agriculture, sugar and foodstuff businesses are pillars of strength.

But then food commodities were hammered by supply chains after the pandemic, and the war in Ukraine.

This shows that even the safest companies, based on essentials, can experience setbacks. To me, that emphasizes the importance of diversification in investment. I rate diversification as the key to long-term investment success, and especially important in tough economic times.

Primark

Some commodity prices are starting to fall. But it seems Primark is leading the recovery for ABF. The latest update tells us that “Primark’s trade has been good in all our markets and is ahead of the curve. We had a very strong Christmas period.“

Like-for-like sales were up 11%, and the week before Christmas set a new sales record. Primark sales also grew in all global markets.

In the past, the food business has provided back-up security for Primark stores. But now, it appears to be the opposite.

Evaluation

There is certainly considerable danger ahead in 2023 and possibly beyond. We really don’t know when commodity markets and global supply chains can return to normal. And in some cases, analysts are predicting higher costs.

The forecast for the full year puts ABF shares at a price-to-earnings ratio (P/E) of around 16. That’s not too much of a stretch. But I also do not see a wide margin of safety in this kind of value.

Analysts have the P/E down to around 12.5 by 2025. But two years is a long time, especially in uncertain economic times.

My general feeling is that Associated British Foods remains a good long-term buy for investors who do their own research. But I expect more short-term volatility. I rate it now as fair.