SUMMARY

  • Devro Plc is a type of business that is so boring it will only attract value investors.
  • The business is yielding a decent 3.7% and tick most of the criteria for being a Warren Buffett company.
  • The market for collagen meat casing has doubled in the last decade, but Devro Plc was growing twice as fast.

 

Brief Introduction

Devro Plc is a spin-off from Johnsons & Johnsons (think baby oil) and has since listed in the LSE in 1993 as an independent company. The name Devro is an acronym of ‘development and research organisation’.

The business is quite boring when you think that it makes casing for cooked products which are edible using collagen.

But the company remains the number one leader and as the global market for collagen had growth by 7% annually in the past decade therefore food-casing is not going anywhere.

Why this might be a Warren Buffett kind of company?

Finding a company that resemble the characteristics of what the sage of Omaha is going to be very hard. Add in the fact that market is nearing their all-time highs this makes it super difficult.

But a 30% drop in Devro’s share price in just one year after a stellar 400% increase since the financial crisis could be an attractive proposition because this company’s has the characteristics of being a Buffett’s company and they’re:

  • Growing twice as fast in the market that they’re operating in.
  • The company has a 48% market share twice that a decade ago this mean the company’s economic moat is widening year-after-year.
  • The company’s return of equity is consistently above 20%, but more importantly this is higher than their cost of capital representing a positive economic return.
  • The increase in dividends pay-out year-after-year is important for the long-term holder because it gives the holder a higher return for the next year (given that the holder doesn’t sell their holdings).
  • Low debt to equity ratio of no more than 30% and earnings covering interest payments of over 12 times.

Why did the company’s share price fell?

However, the events of the last two months have changed the characteristics of Devro. There were two or three company’s RNS that caused this:

First, the company’s full year results, mentions:

  1. The investments in US and China totalled over £90m in the next two to three years where the benefits won’t occur till…

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