Investor/An insider's guide to the market: In October 1986, Kerry Group broke new ground on the Irish Stock Exchange when it floated on the market at an offering price of 52p per share. Even at the time, the amount of capital raised through the sale of new shares at £7.5 million (€9.6 million) was relatively small but it represented a milestone in the company's development.
It also acted as a catalyst for other Irish co-operatives to seek a stock market listing and paved the way towards the emergence of a new "food" sector on the exchange.
The management of Kerry was not slow to raise fresh capital in order to help finance expansion plans. In 1988, they acquired Beatreme, a US food ingredients company, at a cost of $130 million (€105.6 million), which exceeded Kerry's entire market capitalisation at the time.
This proved to be the first in a line of subsequent acquisitions that have transformed Kerry into a global food company. Food ingredients and consumer foods now generate two-thirds of Kerry's operating profits. On the food ingredients side, Kerry is now the preferred supplier of many of the world's global food multinationals.
In its first 15 years or so since flotation, Kerry was led by Mr Denis Brosnan. The chief executive reins recently passed to Mr Hugh Friel and the smooth management transition at the top has reinforced investors' confidence in the ability of management to maintain Kerry's impressive track record.
Today, Kerry has a market capitalisation of €3.3 billion, which makes it one of the Irish market's largest stocks after the two main banks and CRH.
Group turnover hovers around €4 billion with an operating profit margin of 8.6 per cent. This margin is much higher than most food companies.
For example, Glanbia has an operating margin of only 4.7 per cent and Greencore's margin is 6.3 per cent.
Kerry's higher margin is primarily due to its successful expansion into the higher-margin global food ingredients business. Food technology know-how and the willingness and capacity to continuously invest in research and development are key ingredients of success in this segment of the food industry. Because of its much greater sophistication, the food ingredients industry has high barriers to entry and only companies that reach a critical mass are capable of competing.
As well as being more profitable than commodity-type food businesses, food ingredients is far less cyclical and is expected to grow steadily over the long term. Such growth will continue to be driven by the ongoing desire for convenience foods and the emergence of a new focus on healthier food products.
Whilst Kerry's long-term share price performance has been good, from 2000 to 2003 the shares marked time and traded in a range of €12-€15. The price has advanced significantly in 2004, with a year-to-date gain of a shade under 20 per cent.
Despite a tough trading environment and unfavourable foreign exchange rates, the group's interim results to end-June were received favourably by the market. The results were in line with market expectations and analysts are optimistic that the group can achieve satisfactory growth over the medium term. A combination of organic growth and the ongoing impact of acquisitions will drive this growth.
Kerry's spend on acquisitions in 2004 has already reached €668 million with the purchase of Quest accounting for €440 million. This acquisition expands the company's presence in the fast-growing pharmaceutical products sector.
Kerry is continually acquiring new ingredient technologies in a focused acquisition programme that targets flavours, nutrition and pharmaceutical ingredients.
Steady progress in its existing business combined with the positive impact of recent acquisitions should enable Kerry to grow earnings per share by just over 10 per cent in 2004 and 2005. This is reflected in a price/earnings ratio (PER) of 14.3 for this year, falling to a PER of 13.2 based on forecast 2005 earnings.
The dividend yield is a lowly 0.8 per cent reflecting the group's need to fund its active acquisition programme.
Kerry's shares justifiably trade on a higher PER than more traditional food companies such as Glanbia. However, Kerry's stock market rating is lower than some of its international food ingredient peer group.
In an environment where long-term market returns are expected to be much lower than those achieved in the 1990s, Kerry offers investors an attractive mix of growth and defensive qualities.
Growth in the food sector is rarely spectacular but Kerry has proved that a focus on higher-margin sectors can deliver results. Investor takes the view that the improvement in the share price this year can be built upon and therefore the shares are still worth buying at current levels.
