Stockwatch: buy or sell this share in a reputation crisis?

Do the mid-cap shares in meat producer Cranswick (LSE:CWK) rate “buy” or “sell” now that a reputational issue has kicked off? It is quite a case study in how to respond to this kind of thing.

After the Animal Justice Project scored with high-profile Sunday media coverage of its filming abuse and overcrowding at one pig farm, the shares initially dropped about 8% Monday before closing down 7% at 4,980p. Cranswick is the UK’s largest meat producer, and supermarkets launched a damage limitation exercise, saying they had suspended taking supply, although this seems limited to the farm in question.

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You can well imagine management’s response, it being not dissimilar to when mid-cap housebuilder Vistry Group (LSE:VTY) uncovered rogue accounting at a subsidiary. Those managers replaced, a root-and-branch review to affirm this was an isolated matter and, in due course, people start to forget.

At 625p however, Vistry is still well down from around 1,300p last October before its own crisis broke. I think that shows the scandal being a trigger for wider concerns in its business model and similarly Cranswick needs a kick of the tyres – rather than casually assume like the market has done lately, that this is a relatively risk-free growth share - “everyone has to eat.”

I have not written on Cranswick because it often struck me as fully valued, and I was unsure if people might shift more towards plant-type food for health and given the rising cost of meat. But while bacon rates poorly for health, it still has its devotees, chicken is favoured as a low-fat meat, and Cranswick is strong in its production. Beef (which it does not produce) has seen its price continue to soar and people are looking for alternatives.

Cranswick’s share price has still risen strongly from around the 3,000p level over the last two years, and soared last month both after a capital markets day raised targets and investors saw the shares as a tariff-free, relative safe haven. Even after this latest drop, Cranswick shares are up in 2025.

Source: TradingView. Past performance is not a guide to future performance.

Has public revulsion peaked, or not?

In the near-term, expect more bad publicity from campaigners.

To me, the question is whether this ends up like with eggs, where caged hens have been substantially replaced with free-range despite a higher cost. Cranswick is dug in as “factory farmer” where (the latest filming showed) its livestock are permanently confined indoors in cramped conditions – nothing like the green fields and spacious pens depicted on Cranswick’s website. Obviously, when it is supplying most of the big supermarkets, industrial-scale farming is inevitable.

But there simply is not the scale for smaller farms to replace supply with a more “organic” approach. Meat eating would have to radically alter. In this respect, yes Cranswick can recover some mojo - like there is annual concern at safety in the Grand National, but millions still go horse racing.

Mind, however, its business model is still coming into question. Plans for a Cranswick “mega-farm” in Norfolk were rejected last month by councillors after more than 12,000 objections were lodged and 42,000 people signed a petition.

As ever with perceived growth shares, the business can hit constraints as it tries to scale and deliver the kind of progress investors look for. Cranswick could be experiencing such, versus a valuation that prices in a lot.

A good financial year but what will multi-year trend be?

At 4,980p currently, Cranswick’s forward price/earnings (PE) ratio is 18.8x, assuming consensus for £142 million net profit in the year to March 2025 and earnings per share of 265p. That would represent 16.5% annual earnings growth, hence a rating reasonably in line. The longer-term historic record has been bumpier, however, and as yet the expectation is for around 5% earnings growth in the current year to March 2026.

Interim results to 28 September 2024 showed overall revenue up around 6%, with poultry doing especially well – up 16% to nearly 20% of group sales. Fresh pork revenue was 2.8% “ahead” (or flat in inflation-adjusted terms) constituting 24.5% of group revenue, although pig production rose 18% year-on-year to rank as the largest such operation in the UK with around 900,000 pigs at any time. The question now is at what acceptable ethical standard?

Cranswick has aimed for specialty growth segments such as gourmet products where “pigs in blankets” score very well at Christmas, this division constituting 17.1% of revenue, up 8.7%. Pet food revenue advanced 71% albeit just 1.3% at the group level, due to rolling out a Pets at Home contract. This ought to offer material growth if Cranswick can exploit it.

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So management are doing plenty of things right commercially, although it’s unclear whether it will be sufficient versus the rating and if they can withstand much shift in public expectations on farming ethics.

Aided by the adjusted operating margin rising from 6.8% to 7.5% like-for-like, hence 111% free cash conversion of operating profit, net debt of around £50 million was virtually eliminated.

But at this share price level even a 7% expected rise in the dividend this latest financial year, and with 100p looking possible for the current one, Cranswick’s yield is only 2%.

Risk of falling between two stools

The shares rest chiefly on a sense of low risk “growth” with relatively high-quality earnings. But it’s unclear whether that justifies a moderate premium in Cranswick’s rating to the likely underlying growth rate, and now the intensive farming model is in critical focus.

If Cranswick becomes judged as slipping off the growth pedestal, the rating is way too high to attract income investors – even with earnings cover for the dividend projected over 2.5%. The table shows material capital expenditure needs, as if free cash flow has no way of supporting a doubled – or preferably trebled – payout.

Source: company accounts

Otherwise, even if the shares retreat to around 2,750p where they traded in 2019 and 2022, the prospective yield would still only be 3.6%. 

With the shares trading at 4x net tangible assets or 3x net assets, there is not exactly a balance sheet prop.

Short selling

In a recent 22 April article, I argued that the Financial Conduct Authority will disadvantage investors by moving its short-selling disclosure regime away from individual positions over 0.5% of a company’s issued share capital. Instead, it will publish an aggregated figure of total short positions.

I cited Marshall Wace as a long-established hedge fund manager shrewd at identifying downside risk, and who it has been helpful to follow over the years.

Lo and behold, it has a circa 0.5% short on Cranswick, established well before this animal abuse furore.

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In early dealings today, the share price is holding firm close to a 5,000p mid-price, as if no persisting aftermath to Sunday’s revelations. A cynical realist, I suspect a lot of people will not fret about pig welfare or factory-farmed chicken.

But together with the Norfolk mega-farm proposal failing, I see real reasons that this share is challenged to sustain a growth rating. Meanwhile, the yield alternative is sparse.

Fair pricing looks nearer 3,000p than 5,000p – where 3,500p would imply a forward PE around 13x, near 3% yield and twice book value. I could end up with egg on my face, but concur with Marshall Wace’s stance: Sell.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.