Why Bunzl’s share price dip presents a buying opportunity

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Why Bunzl’s share price dip presents a buying opportunity
Master Investor Magazine

Master Investor Magazine Issue 54

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Robert Stephens discusses why Bunzl’s competitive advantage and growth prospects could lead to a higher stock price.

An uncertain global macroeconomic outlook could provide an investing opportunity in FTSE 250-listed support services company Bunzl (LON:BNZL). Its recent half-year results showed that challenging operating conditions are weighing on its financial performance, with revenue rising by just 1.2% during the period on a constant currency basis.

However, the business has a long track record of delivering rising profitability. It benefits from a diversified set of operations, clear competitive advantage versus peers and a strategy that may catalyse its long-term performance. As a result, its shares could offer investment appeal following their recent decline.

Competitive advantage

Bunzl’s business is focused on providing a range of customers in a variety of industries with goods that are essential to their ongoing performance, but that are not resold. They include non-food consumables, such as food packaging, healthcare consumables, such as gloves, and protection equipment, such as hard hats.

The company’s competitive advantage is derived from the broad range of services it offers, as well as from the convenience it provides to its customers. Essentially, it offers a one-stop-shop that provides a simple, yet customised, solution that is cost-effective to businesses so that they can focus their efforts on their core operations.

As a result, the company is an integral part of the operations of a wide range of companies in a variety of sectors. This provides it with a degree of resilience and consistency which has enabled it to raise dividends per share for 26 years in a row.

Growth strategy

A key growth area for the business is its digital offering. It is investing heavily in IT and digital projects, with it having rolled out several digital platforms that enhance its customers’ experience.

This has led to improved order processing, as well as a larger amount of data that can be used to boost efficiency. It has also integrated its digital offering into its customers’ procurement systems in order to provide greater convenience, as well as closer relationships with existing clients.

The company’s investment in sustainability, such as through sourcing environmentally-friendly packaging, helps its customers to meet their sustainability agendas. The breadth of products it can supply to businesses actively contributes to their improving sustainability through fewer deliveries being required, which could increase demand for its services as environmental concerns become heightened in the long run.

In addition, Bunzl has sought to make efficiencies through the consolidation of its warehouse footprint. This could help the company to mitigate the impact of an uncertain operating environment in the short run.

Investment prospects

Bunzl’s share price has fallen throughout the last six months, with it now being 15% lower than it was in March. A weak operating environment may contribute to heightened volatility for the company’s shares in the near term.

However, since it now trades on a price-earnings ratio of 16, it seems to offer fair value for money given its track record of growth. Despite challenging operating conditions, it is on track to meet guidance for the current year. With further investment in efficiency measures and its digital capabilities, alongside a strong competitive position, the stock could deliver high returns in the long run.

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