Shares for the future: why this stock tumbles out of my top 10

In July, protective packaging supplier Macfarlane Group (LSE:MACF) warned that adjusted operating profit for the full year might be 10% lower in the year to December 2025 than it was in 2024. 

While modest, it would have been the worst profit decline in the 12 years documented in my spreadsheet.

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Warning after warning

Coming after a period of strength that had lifted return on capital and profit growth, I chose not to lower Macfarlane’s score. I recognised the company’s performance would be dented, but I didn’t want to overreact. Instead, I wrote: “Further profit warnings might force me to intervene and reduce the score before Macfarlane publishes its next annual report.”

The company was battling to increase sales and reduce costs. Weak demand and price competition meant revenue at Macfarlane’s distribution business had fallen. Costs, including raw materials such as corrugate (corrugated cardboard) and wages, had increased.

A recruitment drive for sales people, a website reboot, and a new distribution centre had 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.

Sadly, we are in that half-year now, and the time to re-score Macfarlane has come. What was already the worst year-on-year performance in my digital memory, was revealed in a trading update last week to be much worse.

Macfarlane now estimates that adjusted operating profit in 2025 will be 20-25% below the consensus of analysts, which it helpfully disclosed to be £24.7 million before the update. A 25% reduction on the consensus is £18.5 million, a 32% decline in adjusted operating profit compared to 2024.

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The turnaround is taking longer than the company anticipated, and a worker has died, reportedly at Pitreavie’s Cumbernauld site, which is one of four Pitreavie manufacturing and distribution sites in Scotland. The site is not operating while the police and Health and Safety Executive investigate.

Pitreavie contributes to Macfarlane’s hitherto more robust manufacturing division, which makes bespoke protective packaging for valuable products in storage and transit. The Cumbernauld site manufactures corrugated boxes, and I imagine its closure may hinder operations at Pitreavie’s other sites.

Macfarlane acquired Pitreavie last January. Part of the rationale was to distribute Pitreavie-made packaging more widely through Macfarlane’s network in the North of England. This may take longer to realise in full now.

The company doesn’t say which is the greater contributor to the anticipated deterioration in performance, poor trading, or the site closure, but it says the tragedy at Pitreavie will have a “material” impact.

Strategy: coherent but unproven

Before I reveal Macfarlane’s new score, I should reiterate some positives.

Macfarlane aims to reduce packaging costs for its customers, but price is only one factor in that calculus. It seeks to reduce the cost of breakages, returns, storage, transit, and environmental impact by providing better packaging. This gives the company an opportunity to sell higher-quality packaging, at higher margins.

The company is a national distributor of protective packaging. It competes effectively against local rivals because of its scale, and because customers with a national footprint prefer to source from a national distributor. Larger, often multinational distributors, tend to be less specialised.

For much of the last decade, Macfarlane was content to grow by acquiring local distributors to grow 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.

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In recent years, the emphasis has switched from UK distribution to manufacturers and overseas distributors, perhaps because Macfarlane already has a strong presence in UK distribution.

Manufacturing earns higher profit margins, and Macfarlane thinks it can use its national distribution network to grow these businesses by selling their products.

To establish itself in Europe, the company is “following the customer”, acquiring distributors where its UK customers already do business. So far, Macfarlane has made one German acquisition in 2022, and it also operates a distribution centre in the Netherlands.

In theory, it is a coherent strategy, but it’s too early to be confident. It remains to be seen whether adding manufacturers and overseas distributors is as reliable a source of growth as the simpler UK distribution roll-up strategy was.

Scoring Macfarlane: when in doubt...

Over the six years starting in 2019, Macfarlane earned a return on capital of 25%. During the six years before 2019, it earned an average return on capital of 13%. The 12-year average, which I use to form a judgement on the quality of the business and calculate the price score, is 19%, which is pretty high.

But three numbers for the full year to December 2025 are likely to breach benchmarks I set. The rate of profit growth will fall below 10% compound annual growth rate (CAGR), Return on Total Invested Capital (including acquired intangible assets at cost) will fall below 10%, and the debt to capital ratio will be higher than the 58% at year end.

If sustained, low growth and elevated debt would be enough to transform the business in my eyes from a really good one going through a sticky period to a decent enough business struggling to turn profitability into growth.

It would bring into question the acquisition strategy, which is risky because of the debt, and because in acquiring manufacturers and European distributors the company is trying something new. If ROTIC stays low, the strategy may not be good value for money.

Incorporating these doubts into my score more fully, has reduced it by half a point.

It is perhaps testimony to the safety of modern factories (and how few people work in them) that I’m in uncharted territory concerning Pitreavie. I don’t think there has been a workplace death at any Share Sleuth share, which makes me uncertain about the repercussions from this sad event.

Until we know more, I’m marking the share down by another half point.

I thought Macfarlane was a growth share, but now it is in recovery mode.

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%).

Thorpe (F W) (LSE:TFW) and Volution Group (LSE:FAN) have published annual reports and are due to be re-scored.

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, please see Richard’s explainer.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard