It has been a long, sticky road for Croda International PLC (LSE:CRDA), the Yorkshire-based chemicals group best known for the ingredients that make shampoo silky and lipstick smooth.
After a few years in which costs ballooned and investors fretted over shrinking margins, things finally seem to be moving in the right direction.
JP Morgan’s analysts, who upgraded the shares to “overweight” after the first-half results, say the latest trading update justifies their optimism.
Croda’s organic sales grew 6.5% in the third quarter compared with a year earlier, a little better than the broker’s forecast of 5%. In an industry where many rivals are still battling flat or falling volumes, that counts as solid progress.
The bank reckons the painful cycle of earnings downgrades has largely run its course. Consensus forecasts, it suggests, are now on firmer ground even as much of the chemicals sector continues to face pressure.
Better execution, from improving sales growth to tighter control of costs and working capital, should help earnings rise by more than 10% a year over the next two years, with returns on invested capital improving by more than two and a half percentage points, albeit from low levels.
Margins are another bright spot. Croda managed to keep its gross margin steady at about 45% in the third quarter, among the highest in its peer group. Prices have held up too, which is notable in a market where many others have had to cut.
Volume growth was in the low double digits, again, a contrast to the stagnation elsewhere in the sector.
The company’s pharmaceuticals arm faces a few near-term headwinds, particularly from policy changes in the US, but JP Morgan thinks the long-term opportunity remains intact.
Croda’s pipeline of projects spans multiple therapeutic areas, not just the much-discussed messenger RNA vaccines, and most of the investment to support that pipeline has already been made.
Valuation could provide the next catalyst. The shares trade on about 20 times forecast earnings for 2025, falling to 17 times for 2026, below the group’s five- and ten-year averages. If earnings delivery keeps pace with expectations, that gap could start to close.
After a stretch of sticky results, Croda looks to be finding its footing again.