Kerry Group underrated at current prices, says Davy

THE latest analysis of Kerry Group, a leading food ingredients supplier, says the Tralee, Co Kerry-based group is underrated at current prices.

Kerry this year will return to double digit earnings of 10.7%, and it will be the first time since 2002 that it moves back up into that category.

For many years up to that point the group had delivered earnings growth in double figures, driven by global expansion and the sharp focus of the group on flavourings and fat substitutes in a whole range of food and dairy products.

Davy Research in its latest review of the business has reiterated its outperform endorsement on the stock, arguing the quality of the earnings being generated by the group was as critical to its analysis of the future of the group as the return to double digit earnings growth.

“While the headline EPS [earnings per share] growth rate is important, it fails to capture the full story – a business generating improving returns on capital, resulting in a better quality earnings stream,” it said.

The group has consistently generated returns on invested capital over its weighted average cost of capital. Since 2005, the average return on invested capital/ weighted average cost of capital spread has averaged circa 6%.

Since 2005 these measures have both increased by 1.6% but despite that the underlying share price has not reflected those positive changes in the group.

Its average price to earnings ratio in 2005 was 14.5 times against the current rating of 12.1 times, while back then the adjusted earnings grew by just 7% against the broker’s current financial year 2010 forecast of 10.7%.

Because of the combination of its consumer foods to food ingredients mix Kerry Group continues to generate value for investors.

“We continue to buy into the Kerry operating model and management team,” it said.

A crucial part of that model has been the “go to market” strategy operating out of Beloit, Wisconsin, set up by Kerry boss Stan McCarthy.

Mr McCarthy outlined that plan from his earliest days, pointing out the group has enormous internal research based resources built up over decades.