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Earnings: why Associated British Foods shares are climbing

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From their 2022 low point, Associated British Foods (LSE: ABF) shares have put in one of the best performances in the FTSE 100. Since early October, we’ve seen a 50% gain.

The stock is still well down from its pre-pandemic levels. So does the recovery have further to go? A trading update released Tuesday sheds some light on that question.

Rising sales

Revenue gained across the board in the 16 weeks to 7 January 2023, up 20% on the same period a year ago. That’s at actual exchange rates, with a 16% increase at constant currency due to the strength of the US dollar.

This all ties in with the company’s expectation of a significant growth in sales for the full year. On the downside, adjusted operating profit and earnings per share are still expected to fall this year.

It can be tricky to get a handle on Associated British Foods as an overall company, as it’s essentially two approximately equal size businesses in one. There’s Primark. And there’s all the food stuff.

Double whammy

Traditionally, that split has provided a bit of welcome safety. The budget fashion business can be fickle, and carries the risk of trends moving elsewhere. And when the high street was hit by Covid, the groceries, agriculture, sugar and food ingredients businesses was a pillar of strength.

But then food commodities were hammered by the supply-chain aftermath of the pandemic, and the war in Ukraine.

It shows that even the apparently safest companies, based on essential goods, can suffer their downturns. For me, that emphasises the importance of diversification in investments. I rate diversification as key to long-term investing success, and especially important in tough economic times.

Primark

Some commodities prices are starting to fall. But it seems Primark is leading the recovery for ABF. The latest update told us that “Primark trading has been good in all our markets and was ahead of expectation. We had a very strong Christmas period.

Like-for-like sales were up 11%, and the week leading up to Christmas Day resulted in a new sales record. Primark sales grew across all global markets too.

In the past, the food business has provided a bit of back-up safety for Primark retail. Right now, though, it appears it’s the opposite.

Valuation

There’s certainly a fair bit of danger ahead in 2023 and possibly beyond. We really don’t know when commodities markets and the global supply chain might get back to normal. And in a number of cases, analysts are predicting permanently higher costs.

Forecasts for the full year put ABF shares on a price-to-earnings (P/E) ratio of around 16. That’s not too stretching. But I also don’t see a big safety margin in that kind of valuation.

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

My general feel is that Associated British Foods remains a decent long-term buy for investors who do their own research. But I expect further short-term volatility. I rate the current valuation as fair.

The post Earnings: why Associated British Foods shares are climbing appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.