Bunzl Tumbles, But Can the Giant Recover?

The business services giant is grappling with a challenging environment and implementing long-term measures that may unsettle short-term investors.

A Reflection of the Times

Bunzl stock has plummeted by approximately 30% so far this year, which is not only attributable to its operations being based in North America but also to currency headwinds resulting from a weakening dollar. The company suffered a 25% decline after revising its outlook downward just two weeks ago and has since struggled to regain momentum despite some positive news on the trade war front. Investors were also disappointed by the company's decision to discontinue its share buyback programme for the rest of the year, leaving £95 million of the authorised £200 million unspent.

The company dedicated considerable time to talk about the uncertain trading environment, saying that the suspension of the share buyback programme was a measure to shore up its available capital. However, it did acknowledge a decline in operating margin, as the company has had to invest to adapt to changes in operating models among its key customers. Bunzl is well-positioned to benefit from an inflationary environment; however, deflationary trends in the US have impacted its margins. The company anticipates that this situation will persist in the near term, with the operating margin expected to decline to 8% from 8.3% in the previous year.

A Potential Reversal?

The company still expects moderate revenue growth but has primarily achieved sales through acquisitions. Organic growth at actual exchange rates was a mere 0.8% for the trading year, compared to total revenue growth of 2.6%. If it prioritises preserving capital, it may not be motivated to pursue further acquisitions in the near term that would increase sales. On the other hand, having capital in reserve and making investments to improve its operating margin could position the company to regain momentum later in the year. The IMF raised its projections for US inflation to 3% from 2%, which could be favourable for Bunzl.

The primary concern for the company and its investors is economic uncertainty. As a supplier to predominantly discretionary spending sectors, a slowdown in US consumer confidence would cause investors to worry. What the company requires for a full-fledged rebound is the normalisation of trade disputes that are perceived to threaten US economic growth and consumer confidence. Recently, there have been indications that the Trump Administration is seeking to reach a deal with China in the near term. However, until there is solid news on this front, Bunzl's share price is likely to remain under pressure.

Bunzl's DCB Raises Alarms

Bunzl's stock appears to have topped out at 3750 GBX and formed a broadening wedge pattern on its way down, which led to an impulse decline to 2250 that could turn into a dead cat bounce (DCB). Staying below 2680 could lead to lower prices, with a target of 2120, which would then open the door to prices below 2000, potentially exposing the low of 1600 and ultimately reaching 1250. Conversely, key resistance to watch above 2500 is set at 2680.

Source: SpreadEx / BUNLZ

Key Takeaways

Bunzl is facing significant challenges in the current economic environment and has decided to implement long-term measures to adapt to changes in customer operating models, which have unsettled short-term investors. The company expects moderate revenue growth, but its operating margin has declined due to these necessary investments, as well as economic uncertainty, particularly related to trade disputes and consumer confidence in the US, which remains a primary concern.