06-05-2025
Founded in an Oxfordshire pub, this business leads the world in pig polishing
Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
Confusion still reigns as Donald Trump strikes a trade deal with Ukraine and offers further exemptions to his proposed package of reciprocal tariffs, but continues to posit income tax cuts funded by revenues generated from these very duties.
The first two are helping to drive double-digit percentage rallies from early April's lows in headline US equity indices such as the S&P 500 and the Nasdaq and healthy gains elsewhere, including the UK. Whether the bottom is in, or whether this is a classic short-covering, bear-market rally is hard to gauge because nobody knows what is coming next.
Those investors who seek a haven from the volatility can perhaps seek out defensive sectors and companies, where demand is relatively insulated from the vagaries of the economic cycle, such as utilities. Portfolio holdings such as National Grid and SSE fit the bill here.
Another approach is to look for firms where the business model has a distinct rhythm of its own, which brings us to animal genetics specialist Genus.
The business has two main units – pig improvement company (PIC) and American breeders service (ABS) – which serve the porcine and bovine markets respectively, across the globe.
Genus's analysis and expertise in genomics helps farmers to raise animals which grow faster and are more resistant to disease, to help meet the growing demand for protein while reducing resource needs and environmental impact.
In the case of ABS, Genus can help dairy farmers increase the chance of cows giving birth to female calves suitable for dairy production or young more suited to beef production. At PIC, revenues are recognised either upfront, in the form of full fair value for the animal, or via royalties as piglets are weaned, while ABS sells straws of semen or embryos from elite genetic lines, as well as related technical services.
PIC is the global leader in its field while ABS ranks second in the bovine arena. Besides this strong competitive position, there are three potential reasons for looking more closely at the Basingstoke-headquartered company.
First, the share price chart goes from the top-left-hand corner of the screen to the bottom right for most of the past five years, something that always catches this column's eye. The shares are down by 70pc from their 2021 highs, largely thanks to the conclusion of pig herd restocking in China in the wake of a swine fever outbreak and a subsequent collapse in pork prices there.
Second, the company's first-half results in January delivered what analysts described as the first positive upside surprise to earnings estimates for three years, suggesting the company had finally turned a corner.
Finally, America's key regulator in this area, the Food and Drug Administration (FDA) is giving its approval to Genus's porcine reproductive and respiratory syndrome (PRRS) pig resistant programme (PRP).
Brazil had already given PRP and gene-edited pigs the nod, and other nations, such as Mexico, Canada and Japan, may now be inclined to do the same. Given the devastating effect the PRRS virus can have upon herds – and farmers' incomes owing to the antibiotics bills and premature death rates – demand could be strong, to the great benefit of Genus' sales and profits.
FDA approval opens the way to commercialisation of PRP and analysts' forecasts are yet to really factor in the potential upside.
As ever, there are risks. The US represents nearly 40pc of Genus's total sales, primarily from the PIC. As a result, Trump, trade and tariffs again hover into view.
The good news is that Genus imports little and it has five sites in America, including a research and development team in Madison, Wisconsin. The danger comes from Genus exports from America, should other nations impose retaliatory tariffs, especially Mexico and Canada, so investors must keep a watching brief here.
In addition, net debt has climbed in the past few years, thanks in part to new leases on farms in China, while the valuation does not look that tempting at first glance.
In the case of the former, at least interest cover is still good, once a number of exceptional items are taken out of fiscal 2024's messy set of results. With regard to the latter, earnings are still relatively depressed, so that inflates the price-to-earnings multiple, and the rating could start to drop quickly if PRP delivers on its potential and profits growth gathers fresh momentum.
Europe's outbreak of foot-and-mouth disease is another near-term complication, although a severe episode could eventually force farmers to restock in the manner of China at the turn of this decade, a process which gave Genus's profits and cash flows a lift.
Questor says: Buy
Ticker: GNS
