Croda International Is Down 50%: High Quality At A Reasonable Price?

21st May by Roland Head

12 comments 2561 reads

Summary

Pros:

Croda has a long track record of innovation and high-margin growth
Opportunity to buy a proven quality compounder after a sharp sell off
Business benefits from broad exposure to market sectors such as beauty and crop protection, which are expected to have long-term growth potential

Cons:

Three profit warnings in 12 months suggest a possible failure of financial guidance
Any failure to rebuild margins could trigger a further de-rating
Croda may be at some risk of losing volumes to competitors as market conditions normalise after a sharp slump

Profile

About the stock

Croda International (LON:CRDA) is a chemicals business with specialisms in Consumer Care and Life Sciences. It’s classified in the Basic Materials sector, within the Chemicals industry group.

Croda floated on the London market in 1964 and is currently a member of the FTSE 100, with a market cap of £6.7bn and a recent share price of 4,800p.

The StockRanks show above-average quality and momentum scores for Croda International, with a rather low score for value.

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This mix of factor ranks is reflected in Croda’s High Flyer style rating. This is a winning style in the Stockopedia classification system that’s used to describe shares that are good (high quality) but expensive.

Croda’s StockRank Style rating has moved from Falling Star to High Flyer in recent months, perhaps suggesting that the worst of the company’s earnings slump has now passed.

While these style ratings are not intended to be used as an investment strategy, in my experience they can provide useful context about a company’s situation.

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About the opportunity

Croda has issued three profit warnings over the last year (June ‘23, Oct ‘23, Feb ‘24) as the company appeared to repeatedly underestimate the scale of a slowdown in demand across its main businesses.

unprecedented destocking and demand weakness in Beauty, Crop and Industrial markets

In addition to this, an exceptional surge in profits from selling a chemical used in COVID-19 vaccines has dropped out of Croda’s numbers over the last 18 months.

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Finally, the divestment of some of the group’s…

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Cricketfan

21st May

Very informative Roland. I am not too sure whether this interests me at the moment and will take a look at the numbers and more importantly the commentaries in the last annual report. This may be one for me to add to watch list for the future especially as there seem to be quite a few more likely candidates for the short term.

Nevertheless thank you!

AcornInvestor

Very detailed and thoughtful analysis, thank you.

rmillaree

Cheers Roland great post - always nice to have stuff like this on record - perhaps when the trend of earning estimates starts to tick up that will be when the shareprice persk up - albeit pe doesnt seem amazingly cheap anyway but that should be expected with cyclical stocks if the good times are coming but they arent flagged up to the market.

dodge1664

I'd be interested to know why 2023 operating costs are so much higher than 2018. Is this raw material and wage inflation? couldn't find an answer in the 2023 annual report.

Rusty2

Could be gas prices? Chemical companies were hit badly by the increase in cost of gas.

You only have to look at Synthomer (LON:SYNT), which has doubled in thelast 10 weeks, to see how the share price can take off, Croda International (LON:CRDA) does not look that cheap.

peterthegreat

In addition to the factors suggested, I think the operating costs have also increased as a result of Croda's strategic decision to focus more on life sciences. In its most recent 2024 Q1 sales statement Croda said it was " accelerating conversion of our exciting pharma pipeline" and as we all know, developing pharma pipelines (be they drugs or Croda's lipids used for mRNA based vaccines and drugs) is an expensive process. Whilst Croda is clearly still mainly a chemicals company, it now has significant biotech-related interests and some of its future success will depend on how widely mRNA vaccines and drugs using the company's lipids are used. As the company rightly suggests this is indeed "exciting" but I think it adds up front costs and an element of "jam tomorrow" for the company.

22nd May

thanks for the replies. So perhaps the big question is whether this life science development is "exciting", or whether Croda is expanding outside its zone of competence.

NeilS

23rd May

Thank you Roland! Very insightful indeed! I have held for approx 12 years and I still feel that this is a great business though highly dependent on a power selling culture based on innovation. I was particularly interested in this comment referring to volume/commodity products;

“When it has inherited such products in the past through acquisitions, the company has typically divested them or else increased pricing to the point where they are no longer saleable and can be discontinued.”

I was interested to know how you made or derived that observation with regard to increasing pricing to the point a product can be killed off as it is something so succinct and I had completely missed it!?

I do feel that Croda have to be careful not to out-price their customer base going forward as inflation has already ravaged some sectors and resulted in destocking.

bosquet

24th May

Very thoughtful, well written and structured. Thank you. Pleased I took the time to read it carefully.

Benson

28th May

Thank you for your really well researched article I have also taken it on board as to how much more diligent my own research should be

I am normally a buy and hold investor and had made my original purchase of Croda at less than £10 My sale was because I was very unsure of what was happening in the market at the time. With hindsight ( the cleverest devil in the market) I should have stuck to my long term investment philosophy.

Thank you Roland

Funderstruck

2nd Jun

Thank you Roland for a very comprehensive analysis of CRDA. It is on my longer term watch list.

Croda International is down 50%: high quality at a reasonable price?

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Roland Head

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