Sometimes the best investments are boring, overlooked companies with a strong track record of operational execution. This is the kind of situation we might have at Macfarlane, a Glasgow-based packaging company that has more than 70 years of experience in its chosen sector.

Demand is resilient and growing. Profits have increased every year over the past decade, with impressive progress on operating margins thanks to increasing scale.

And Macfarlane recently announced its best ever first half performance. Meanwhile the shares continue to trade on a modest valuation of just 12.6x forecast earnings. Unsurprisingly, the group qualifies for Stockopedia’s Neglected Firms screen (as well as three others).

In return for buying the stock, shareholders gain exposure to a proven strategy of steady revenue growth, sensible bolt-on acquisitions, and resulting margin enhancement opportunities. That in turn suggests scope for the market to rerate Macfarlane should the perception of this quietly expanding enterprise change.

Broker forecasts factor in very modest progress going forward. Is this view overly prudent given the group’s track record, or, with management warning over cost pressures, are there good reasons to anticipate lower levels of earnings growth in the medium term?

Macfarlane was pitched to the Stockopedia Investment Club on the 7th December 2021 at 135p.

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About the Stock

Macfarlane (LON:MACF) is a packaging distributor and manufacturer listed in the Containers & Packaging industry group of the Basic Materials sector. It’s an Adventurous Super Stock, with a Quality Rank of 81, a Value Rank of 63, and a Momentum Rank of 85 combining for an overall StockRank of 92.

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Its shares currently trade at 136.50p on the LSE Main Market, giving a market cap of £215m. Liquidity is decent for a small cap, with a 37bps spread and an exchange market size of 3,000.

About the Opportunity

Macfarlane can be characterised as a quality GARP (growth-at-a-reasonable price) stock, with above-average growth prospects and a below market-average valuation. The forecast PER of 12.6x belies an impressive track record of year-on-year revenue growth and operating margin expansion.

Revenue is measured along the left vertical axis of the chart below, operating margin on the right.

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Macfarlane has achieved this by aligning itself with growth markets such as ecommerce,…

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