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UK inflation for June rose unexpectedly to 3.6%, the highest reading in over a year. The concern around high inflation means investors are cutting back expectations for how quickly the Bank of England committee will reduce the base rate. As a result, growth shares with low (or zero) debt could outperform highly indebted peers.
Investors will be forced to adjust their view on the cost of taking on new debt and how this could negatively impact stocks with high debt levels. Here are two stocks I’ve identified that have minimal exposure and could therefore perform well.
Low debt enables capex spend
First up is Cranswick (LSE:CWK). The leading UK-based food producer specialises in providing poultry and convenience foods to supermarkets and related foodservice companies. Over the past year, the share price has jumped by 16%.
What interests me in this case is the low debt levels. In the latest full year, the company turned over £2.7bn, with net debt of just £178m. For perspective, net income for the year was £134m, meaning that if the management team wanted to, it could almost wipe out all of the debt via just the latest earnings.
The company’s strong earnings and low debt levels provide it with the flexibility to invest in automation, new product development, and capacity expansion without relying heavily on borrowing. Further, with borrowing costs likely to stay higher for longer, it can avoid having to budget for these interest costs to service new debt.
Interestingly, the latest results showed £138m being committed to capital projects, showing how the business is putting cash to work. Of course, there are risks. One is how sensitive the company is to changes in input cost inflation. If UK price levels continue to rise, it will quickly erode Cranswick’s profit margins.
Focused reduction on costs
Another option to consider is Kier Group (LSE:KIE). The share price is flat over the last year. The construction and infrastructure business has historically struggled with high debt. However, recent restructuring and asset sales have significantly reduced this.
The latest trading update for this month showed a “substantially improved average month-end net debt” figure of £49m. For perspective, this was £116.1m at the same time last year, and £232m the year before. The focus on reducing debt is already yielding benefits to the company.
Of course, lower interest costs going forward will further enhance cash flow. Given the nature of the business, Kier reported a high-quality year-end order book of £11bn. Notably, 88% of the full-year revenue has been secured. With debt low and revenue consistent, it should filter through to a higher profit. In turn, this should act to boost the share price.
One concern is that if interest rates stay high and the UK economy underperforms, new construction contracts might be cancelled or postponed.
But over the coming year, if I’m right about internet rates not falling much, investors could turn to Kier and away from highly indebted stocks. Therefore, it could be an idea for investors to consider now, alongside Cranswick.
This story originally appeared on Motley Fool
