Is Associated British Foods a Buy?


LONDON -- I strongly believe that shares in Associated British Foods should continue their relentless march higher, as the company's products offer the perfect panacea for customers looking for bargains in challenging financial times.

With the Bank of England warning this week that inflation is likely to remain above its 2% target until 2016, reduced spending power should keep demand for ABF's suite of budget goods firmly on the burner.

Primark powering higher
ABF's interims released last month showed group revenues up 10% during the 16 weeks to Jan. 5, fueled by the group's Primark budget clothes chain where turnover leapt by a quarter.

Excellent like-for-like sales growth, a chunky rise in new retail space, and better sales densities within new, larger stores all helped to drive revenue skyward.

Last year the division added 14 new stores across Europe to its already-bulging retail chain, including another outlet on London's prestigious Oxford Street and a move into the previously untapped Austrian market, where two new outlets were opened.

Total retail space of 8.9 million square feet is up 14% from around the same point in 2012, and the company now boasts 256 stores across the globe. Although the rate of expansion is set to moderate this year, new store openings are scheduled to resume their breakneck pace during 2014. This should propel volumes over the longer term and provide the next stage of ABF's growth story.

A reliable deliverer of earnings growth
ABF's reputation as a solid defensive stock is justified in my opinion, the company displaying a steady stream of earnings growth regardless of the macro-economic backcloth.

According to the City consensus, earnings per share are expected to remain in double-digit territory for the next couple of years -- growth of 10% is anticipated for both 2013 and 2014, with a figure of 95.5 pence this year projected to rise to 105.5 pence the next.

As for valuation, a P/E ratio of 18.8 for 2013 is expected to rise from 14.6 the previous year, before nudging lower again to 17 in 2014. But I feel ABF is fully deserving of this rating given its enviable earnings momentum and exciting expansion plans for its Primark brand.

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Royston Wild does not own shares in Associated British Foods. The Motley Fool recommends Associated British Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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