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I’m hunting for an underappreciated growth share to tuck into my ISA, but I’m not planning to buy more of Rolls-Royce. The FTSE 100 aerospace engineer has had another storming month after full-year numbers beat forecasts again. The shares have climbed 87% in a year and 1,187% over five. It’s been a spectacular turnaround, yet with a price-to-earnings ratio of 65, expectations look too high for my liking today.
That leaves me searching for the next recovery candidate. It’s easy to forget Rolls-Royce was once on its knees before roaring back. There are other blue-chips still nursing bruises. One that stands out is Croda International (LSE: CRDA), a speciality chemicals group whose share price is roughly 50% lower than five years ago.
Finally climbing
Croda got caught out by Covid. Sales surged as customers stockpiled key chemicals, then plunged while they worked through surplus inventories.
The latest annual results, released on 24 February, suggest that process is now over. Sales for the year to December rose 6.6% to £1.7bn on a constant-currency basis, while adjusted EBITDA earnings increased 7.1% to £397m. Management warned trading conditions remain unsettled, with geopolitical strains, US tariffs and currency swings all hitting visibility.
The shares are still down 5% over one year, but jumped 11% in February. They enjoyed a lift earlier in the month after JPMorgan hiked its price target to 4,000p from 3,600p. With the shares at 3,127p, that implies a potential 28% gain. JPMorgan reckons earnings downgrades have largely run their course and recent investments could drive growth.
FTSE 100 recovery opportunity
Croda operates in niche markets spanning consumer care, life sciences and industrial ingredients, where technical expertise and long customer relationships can create pricing power. That can help protect margins when demand improves. The group has also been investing heavily in higher-value, sustainability-focused products.
Another attraction is its dividend record. Croda has increased its payout for more than three decades, including throughout recent troubles. In fact over the last five years, shareholder payouts have increased at an average rate of just over 4% annually The trailing yield has now climbed to 3.7%. That consistency suggests a resilient underlying business. By contrast, Rolls-Royce had scrapped dividends altogether before it’s recovery.
Toppy price-to-earnings ratio
Croda isn’t a bargain-basement buy. The price-to-earnings ratio is 21.7. That’s higher than I expected given recent struggles. Risks remain. A slower global economy could curb demand from key end markets such as beauty and pharmaceuticals. Raw material costs and currency movements may squeeze margins.
Recent capital spending and acquisitions must translate into stronger sales and cash generation. If that fails to materialise, investors could drift away again.
On balance, Croda looks like a credible recovery play for investors prepared to take a long-term view. It almost certainly won’t repeat the fireworks seen at Rolls-Royce. But I think it’s worth considering with a long-term view. I can see three other FTSE 100 stocks that have fallen by half over the last five years: Entain, JD Sports Fashion and easyJet. I’m checking them out too. I can see plenty of recovery potential beyond Rolls-Royce.
