Sector Screener: this food producer’s shares could keep growing

Recent economic and stock market turbulence may prompt some investors to pivot towards defensive sectors. After all, the near-term outlook for cyclical firms that are reliant on the world economy’s growth rate now appears to be more opaque than it was even a few weeks ago. Previous forecasts for inflation, interest rates and GDP growth across developed economies, for example, now appear to be grossly out of date given the imposition of US tariffs on imported goods.

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Defensive sectors, which are inherently less impacted by global economic events, could hold investment appeal for several reasons. They may offer lower levels of volatility than the wider index in the short run, while providing a more stable income return alongside capital growth that is less erratic over the medium term.

And while they may struggle to outperform cyclical sectors as the economy’s performance typically reverts to its long-term average, defensive sectors could still have investment potential given current market conditions.

Defensive appeal

The FTSE 350 Food Producers sector could prove popular among investors at the present time. While the FTSE 350 index declined by around 13% from its 2025 peak in early March to its lowest ebb year to date in early April, the Food Producers sector dropped by a far more modest 4% over the same period. While it does not mean this trend will continue should the wider index experience further bouts of volatility, it nevertheless highlights that market participants may view the sector as being a relatively defensive option.

After all, food is a basic human need. While consumers can postpone or cease the purchase of a wide range of goods and services, food is not among them. Food producers should, in theory at least, experience relatively consistent demand for their products that does not materially change based on the economy’s prospects. Indeed, consumers will typically cut back on a raft of discretionary spending before looking to reduce the amount spent on staple goods.

Source ShareScope. Data as at 24 April 2025. Past performance is not a guide to future performance.

Source ShareScope. Data as at 24 April 2025. Past performance is not a guide to future performance.

Sector nuances

However, the entire Food Producers sector may not be quite as defensive as some investors perceive. Although food is a necessity, it may not be immune from changing consumer spending habits during an uncertain financial period.

For example, consumers may trade down from premium foods to budget versions if their household finances come under pressure. Similarly, they may swap well-known brands for supermarket-own brands that are typically cheaper. And with some food categories themselves being somewhat discretionary, for example, sweet or savoury snacks, food producers could find that demand for their products wanes amid an uncertain economic outlook.

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In addition, food producers themselves may struggle to overcome a challenging economic period. For instance, inflation that remains above the Bank of England’s 2% target could equate to a fast-paced rise in their costs which they struggle to pass on to consumers. And with several food producers exporting their products outside the UK, they could be affected by increasing protectionism across international markets.

A selective approach

Investors should, therefore, be selective in terms of which food producers they focus on. Some companies will inevitably be better placed than others to overcome an uncertain economic period simply because of the type, range and price point of the products they sell.

Furthermore, firms that have a solid balance sheet may be better equipped to survive a period of lower demand from consumers. Similarly, those companies that benefit from a competitive advantage, such as via lower costs, may be able to adopt a keener pricing structure than their peers. Meanwhile, food producers whose shares include a wide margin of safety could be supported by their modest market valuation.

By selecting those food producers that have superior fundamentals than their peers, investors may benefit not only from their defensive qualities. They may also generate strong capital growth over the coming years.

Strong performance

FTSE 250-listed food producer Cranswick has posted a 14% capital gain since first being discussed in this column in June last year. This is 18 percentage points ahead of the FTSE 350 Food Producers sector, while the mid-cap index is down 6% over the same period.

Partly as a result of its gain over recent months, the producer of pork, poultry and gourmet products now trades on a relatively rich price/earnings (PE) ratio of 20.9. While this is substantially higher than many mid-cap shares, especially after the FTSE 250’s lacklustre recent performance, the company’s sound competitive position means it may be worthy of a premium valuation.

Competitive advantage

Indeed, the firm’s vertically integrated business model provides significant control over its supply chain. It farms, produces and supplies a wide range of products that may equate to lower overall costs and greater efficiencies than if it was a single part of the supply chain. This could prove useful during periods of economic uncertainty, since the company may be able to implement more competitive pricing than its rivals.

The firm’s competitive position is, furthermore, continuing to improve. In the first half of the 2025 financial year, for example, it delivered a 67-basis point rise in its operating profit margin to 7.5%. Meanwhile, the company’s return on equity figure in the 2024 financial year was 13%, despite a modest leverage. The company’s net debt-to-equity ratio, for example, amounted to just 11%. Alongside net interest cover of 18.8 in its latest financial year, this suggests it has the financial standing to overcome an uncertain economic period.

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Modest debts also mean the firm is well placed to engage in M&A activity to capitalise on potentially lower valuations across the wider sector. For instance, it announced the purchase of a pig genetics company alongside its latest quarterly trading update. The update further showed that the business remained on track to meet financial guidance for the 2025 financial year.

Following its trading update, the firm announced that it expects earnings per share to rise at a mid-single digit rate over the medium term. Although this may appear to be rather modest at first glance, especially compared to the long-term outlook for some cyclical stocks, Cranswick’s strong track record of growth highlights its defensive qualities.

For example, it has generated an annualised rise in earnings per share of 11% over the past five years. This is despite the presence of challenging economic periods during that time. And with the firm having defensive characteristics, it could be well placed to produce an upbeat financial performance over the coming years. Indeed, the company’s variety of products and a wide-ranging customer base that includes supermarkets and quick service restaurants, provides diversification benefits.

Risk/reward ratio

Clearly, though, Cranswick is not immune from economic or industry-related challenges. While 98% of its sales are generated in the UK, the company’s performance could still be negatively impacted by a tough period for the world economy as US tariffs take hold. Furthermore, the prospect of cost-of-living challenges in the UK may lead to a change in consumer behaviour that negatively affects demand for the company’s products.

However, with a solid balance sheet, a strong competitive position and a sound business model, the company’s shares appear to have long-term investment potential. They could realistically outperform the wider stock market during a period of economic uncertainty, while the firm’s upbeat growth outlook means it could deliver further index outperformance in the long run.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.