Shares for the future: rising risk forces downgrade
Despite being a good business, a bad year has exposed risks that may mean it is not as good as analyst Richard Beddard thought. Here’s why.
25th April 2026 15:00
by Richard Beddard from interactive investor
When I wrote up protective packaging supplier Macfarlane Group (LSE:MACF)in October (scored 7 points and was 20th in my Decision Engine list), it was striving to increase sales and reduce costs.
Weak demand and intense price competition meant revenue at the company’s Packaging Distribution business had fallen. Costs, including raw materials such as cardboard, rent and wages, were higher.
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Annus horribilis
A recruitment drive for sales people, a website reboot, and a new distribution centre also added to costs, but should have contributed to a turnaround, which the company anticipated would begin in the second, and seasonally stronger, half of the year. It did not.
On top of the general economic pain, one of subsidiary Pitreavie’s sites, a corrugated box factory in Cumbernauld, closed temporarily due to a fatality there in October, two months before the year-end.
The closure and outsourcing of manufacturing meant Pitreavie made a loss in the year to December 2025.
Group revenue increased 11% because of additional contributions from two acquisitions, but after-tax adjusted profit plunged 29%. This has damaged Macfarlane’s long-term track record. It has grown revenue and profit fairly consistently at mid-single digit compound annual growth rates (CAGR) over the last 12 years.
Return on capital was sub-par but still respectable at 15%, and cash conversion exceeded 100%. This level of profitability is similar to levels Macfarlane achieved before 2019. Between 2019 and 2024 it beat 25% return on capital most years.
During those prosperous years, the distribution business was buoyed by a dramatic rise in demand for protective packaging from online retailers due to the pandemic. It was also a period during which Macfarlane favoured the acquisition of manufacturers over distributors, building up its higher margin manufacturing division.
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Pitreavie was the latest addition to the manufacturing division, and the acquisition cost was the main reason debt returned to levels last seen before the pandemic in 2025. Capital expenditure also increased, partly due to unplanned spending on replacement equipment at Pitreavie.
Net financial obligations grew to 75% of operating capital, which is high by my standards and close to the long-term average.
Macfarlane is not making any promises about 2026. It reckons the challenging economic conditions will continue. And although the troubled Cumbernauld site is now up and running, it is only expected to return to full operational capacity in the second (current) quarter of the year to December 2026, once the installation of new equipment is completed.
Macfarlane has sworn off acquisitions in 2026, focusing instead on reducing costs in distribution and restoring Pitreavie.
Forecasts anticipate a smidgen of growth.
The acquisition that backfired
The Pitreavie incident is being investigated by the Health and Safety Executive. The investigation is in its early stages, but the outcome could prompt prosecution and hefty fines.
Macfarlane does not yet have enough information to quantify or provide for the eventual cost. But based on “very limited information”, it believes the cost will not have a “material impact” on its finances. Based on that, I am not ruling out the possibility that it will!
The addition of Pitreavie and its subsequent poor performance brings into question Macfarlane’s long history of acquisitions. By my count, it has made 18 mostly low-risk bolt-on acquisitions over the last 11 years, yet its return on capital including the unamortised cost of those acquisitions (Return on Total Invested Capital, or ROTIC) was only 6% in 2025.
The number will improve when Macfarlane brings Pitreavie back up to full strength, but Macfarlane’s average ROTIC is 9%, which is adequate rather than impressive.
Neither David, nor Goliath
Macfarlane aims to lower protective packaging costs for customers by reducing the cost of breakages, returns, storage, transit, and environmental impact through better design.
The larger distribution business sources packaging from over 1,000 suppliers, giving the company an opportunity to differentiate based on convenience, choice and advice.
Packaging Distribution has a national footprint, which the company says enables it to compete effectively against local rivals because of its scale, and because it can supply customers with national footprints.
The smaller manufacturing business designs and makes bespoke packaging for high-value items.
Macfarlane characterises its much larger multinational competitors, manufacturers and direct sellers like Smurfit WestRock (LSE:SWR), DS Smith (International Paper Co (LSE:IPC)), and Mondi (LSE:MNDI), as “packaging generalists”. They don’t just sell protective packaging, they make and sell containers for products and packaging and point-of-sale displays for marketing them as well.
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Macfarlane says it competes “effectively” against them too, presumably due to the broadness of its range and its specialist capabilities. The 2025 annual report highlights bespoke packaging for the transport of fragile windscreens. Macfarlane designed the packaging, and packaging lines.
For much of the last decade, Macfarlane was content to grow by acquiring local distributors for its UK network. This is a low-risk activity, because the businesses are similar, and it creates reliable ways to reduce costs, for example by consolidating warehouses.
In recent years, the focus of the acquisition strategy has shifted from distribution to manufacturing. With a strong presence in the UK, Macfarlane may be reaching the point where adding to the distribution network produces diminishing returns. Hence, it is finding other ways to grow.
Integration ambition
Manufacturing earns higher profit margins, and Macfarlane is using its distribution network to grow these businesses by distributing their products. Part of the rationale for acquiring Pitreavie was to distribute its products more widely through Macfarlane’s network in the North of England.
Macfarlane is also seeking to grow in Europe by “following the customer”, which means supplying UK customers with operations there. It runs distribution centres in neighbouring Ireland and the Netherlands. In 2022, it acquired a German distributor.
It looks like Macfarlane is seeking economies of scale through vertical and horizontal integration, like the protective packaging operations of its generalist rivals. As it becomes more like them, an informed reader who worked in the industry has warned me “usually Goliath beats David”.
I think a different generalisation may apply: usually specialists beat generalists. However, I am an industry outsider, and not confident that a specialist can add that much value to packaging, so I am heeding their warning.
Scoring Macfarlane
Macfarlane is a good business, but a bad year has exposed risks that may mean it is not as good as I thought.
Macfarlane | MACF | Distributes and manufactures protective packaging | 22/04/2026 | 6.5/10 |
How capably has Macfarlane made money? | 2.0 | |||
Macfarlane has grown revenue (7% CAGR) and profit (6% CAGR) by acquisition. Return on capital fell to 15% in 2025 and cash conversion remained strong under the CEO of more than 20 years. It has grown by acquiring packaging distribution businesses to develop a national footprint. | ||||
How big are the risks? | 1.0 | |||
The business is not generating enough profit to justify acquisitionspend. High debt is close to the 12-year average. National coverage and a leading share of UK distribution may reduce the appeal of acquiring more UK distributors. The death of a worker in a tragic incident could result in fines. | ||||
How fair and coherent is its strategy? | 2.5 | |||
The company is increasing its emphasis on manufacturing and overseas distribution. This may bring it into more competition with multinational manufacturers and direct sellers that already have economies of scale. A high NPS gives me confidence in the company's culture. | ||||
How low (high) is the share price compared to normalised profit? | 1.0 | |||
Low. A share price of 69p values the enterprise at £188 million, about 10 times normalised profit. | ||||
NB: Bold text indicates factors that reduce the score. Bold and italicised text doubly so. The maximum score is 3 for each criterion except price, which has a maximum of 1 (explainedhere) | ||||
30 Shares for the future
Here is the ranked list of Decision Engine shares. I review the scores at least once a year, soon after each company has published its annual report. The price scores are calculated using the share price prior to publication.
Generally, I consider shares that score more than 5 out of 10 to be worthy of long-term investment in sizes determined by the ideal holding size (ihs%).
4imprint Group (LSE:FOUR) and Quartix Technologies (LSE:QTX) have published annual reports and are due to be re-scored. I am also planning to re-score Autotrader Group (LSE:AUTO).
0 | company | description | score | qual | price | ih% |
1 | FW Thorpe | Makes lighting systems for commercial, industrial and public settings | 9.0 | 0.9 | 9.8% | |
2 | Hollywood Bowl | Operates tenpin bowling centres | 8.0 | 0.5 | 7.0% | |
3 | James Latham | Distributes imported panel products, timber, and laminates | 7.5 | 1.0 | 7.0% | |
4 | Porvair | Manufactures filters and laboratory equipment | 8.0 | 0.3 | 6.7% | |
5 | Jet2 | Flies people to holiday locations, often on package tours | 7.0 | 1.0 | 6.0% | |
6 | Solid State | Manufactures electronic systems and distributes components | 7.0 | 0.9 | 5.9% | |
7 | Renew | Maintains and improves road, rail, water, and energy infrastructure | 7.5 | 0.4 | 5.8% | |
8 | Goodwin | Casts and machines steel and processes minerals for niche markets | 7.5 | 0.3 | 5.7% | |
9 | Auto Trader | Online marketplace for motor vehicles | 7.0 | 0.8 | 5.5% | |
10 | Howden Joinery | Supplies kitchens and joinery products to builders | 7.0 | 0.7 | 5.4% | |
11 | Softcat | Sells software and hardware to businesses and public sector | 7.0 | 0.6 | 5.3% | |
12 | Bunzl | Distributes essential everyday items consumed by businesses | 7.0 | 0.6 | 5.1% | |
13 | Judges Scientific | Manufactures scientific instruments | 7.0 | 0.5 | 5.1% | |
14 | Churchill China | Manufactures tableware for restaurants etc. | 6.5 | 1.0 | 5.0% | |
15 | Cake Box | Cake shop franchise and sweet manufacturer | 7.0 | 0.2 | 4.4% | |
16 | Oxford Instruments | Makes imaging and semiconductor manufacturing systems | 6.5 | 0.7 | 4.4% | |
17 | Focusrite | Designs recording equipment, synthesisers and sound systems | 6.0 | 1.0 | 4.0% | |
18 | YouGov | Surveys public opinion and conducts market research online | 6.0 | 1.0 | 3.9% | |
19 | Volution | Manufacturer of ventilation products | 8.5 | -1.6 | 3.9% | |
20 | Keystone Law | Operates a network of self-employed lawyers | 6.5 | 0.4 | 3.8% | |
21 | Anpario | Manufactures natural animal feed additives | 7.0 | -0.2 | 3.6% | |
22 | Games Workshop | Designs, makes and distributes Warhammer. Licenses IP | 8.5 | -1.7 | 3.5% | |
23 | Advanced Medical Solutions | Manufactures surgical adhesives, sutures and dressings | 6.5 | 0.1 | 3.1% | |
24 | Macfarlane | Distributes and manufactures protective packaging | 6.5 | 5.5 | 1.0 | 3.0% |
25 | Cohort | Manufactures/supplies defence tech, training, consultancy | 8.0 | -1.6 | 2.7% | |
26 | Bloomsbury Publishing | Publishes books and educational resources | 7.5 | -1.2 | 2.6% | |
27 | Tristel | Manufactures hospital disinfectant | 8.0 | -1.9 | 2.5% | |
28 | Quartix | Supplies vehicle tracking systems to small fleets | 7.5 | -1.8 | 2.5% | |
29 | 4Imprint | Customises and distributes promotional goods | 8.0 | -2.3 | 2.5% | |
30 | Renishaw | Makes tools and systems for manufacturers | 6.5 | -1.5 | 0.0% |
Click on a share's score to see a breakdown (scores may have changed due to movements in share price). Key: qual is the share’s score out of 9 for the three quality factors (capabilities, risks, and strategy), price is the price score from -3 to +1, and ih% is the suggested ideal holding size as a percentage of the total value of a diversified portfolio.
Richard Beddard is a freelance contributor and not a direct employee of interactive investor.
Richard owns Macfarlane and many shares in the Decision Engine. He weights his portfolio so it owns bigger holdings in the higher-scoring shares.
For more on the Decision Engine and Share Sleuth, please see Richard’s explainer.
Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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