Pastygate serves up Greggs investment quandary

Monday, Apr 23 2012 by
6
Pastygate serves up Greggs investment quandary

They say that there is no such thing as bad PR and bakery group Greggs (LON:GRG) has wasted no time in trying to turn the Treasury’s plans to add 20% VAT to warm pies, pasties and sausage rolls to its own advantage. While news of the tax surprise in March inevitably dented shares in the £520 million market cap company, there are still reasons to be cheerful, and no shortage of column inches to promote its products either. 

What’s the story? 

With a 1,500 strong chain of stores around the country, Greggs is a familiar name on Britain’s High Streets. While the company has won praise for its relentless growth in conditions that have caused havoc elsewhere in retail, the last thing it needed was a new tax on its main product lines. Helpfully, a number of politicians, press and public weren’t impressed either – triggering the start of a 'Save Our Savouries' campaign backed by, among others, The Sun. Greggs chief executive Ken McMeikan may not have guessed at the start of the year that he’d be posing for photocalls with Sun models and angry customers but, hey, it’s all in a day’s work for the boss of a FTSE 250 company. 

What’s the bull case? 

March’s Budget news instantly slashed 30p from Greggs’ share price and sucked the wind from the sails of a robust set of full year figures announced a week earlier. Among the highlights there, revenues were up 5.8% to £701 million and pre-tax profits were up a touch at £53.1 million. For dividend hunters, the point of interest was a 6% increase in the full year payout to 19.3p – the 27th consecutive rise in dividends since the company floated in 1984 – which is well covered at more than 2x. 

On the financials, Greggs’ forward P/E of 12.2 is slightly higher than the industry median 9.7, revenues and net profits have grown consistently over five years and the company appears keen to keep opening new stores (84 last year, 90 this year). Return on assets increased for the fourth year to 15% and its operating margin improved from 7.9% to 8.6%. However, in some respects those profitability indicators flatter the company, because… 

What to watch? 

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

…like many retailers, Greggs pays for the majority of its shops under operating leases. For what it’s worth, the company has around £162 million in operating lease commitments spread between 0-5+ years. While not uncommon as an accounting policy (other retailers like JD Sports (LON:JD.) also lump such leases around) its always worth remembering that operating leases are essentially a form of unsecured and fairly risky debt. Analysts regularly reclassify operating leases as capital leases which then show up on the balance sheet as higher assets and liabilities. Briefly, the net impact of performing this financial ninjitsu on the ratios is to make the company appear more levered and less profitable. For a case study on how to account for operating leases, Richard Beddard at iii.co.uk put JD Sports under the spotlight here

Meanwhile, what initially appears to be a niche in the High Street bakery and warm takeaway food sector actually pitches Greggs against competition from the likes of J Sainsbury (LON:SBRY) and Tesco (LON:TSCO) among others. Larger grocery chains have been acting in increasing numbers to open smaller High Street stores and their in-store bakery/retail offering certainly encroaches on Greggs’ competitive positioning. In its results, the company said that sales had dipped by 1.8% in the first 10 weeks of the new year and hinted that bad weather could have been the main cause. Analysts were less certain that is wasn’t starting to feel the effects of a highly competitive market for coffee and snacks on the High Street. 

What kind of investors might look at Greggs? 

There are plenty of reasons to think that shares in Greggs will continue to be supported by the financial community because it covers many of the bases. While the pasty tax has hit the shares recently, over multiple timeframes the stock has performed well. The sustained momentum in the company’s share price qualifies Greggs for a place on our Value Momentum screen, which aims to track down attractively prices stocks that are on the move. Meanwhile, that stellar dividend record makes Greggs one of just 45 London listed stocks to appear on our Best Dividends screen, which is currently flying with a return of 11.37% over the past three months versus a more modest 0.74% for the FTSE 100. 

Until recently, Greggs was also qualifying for our take on Robbie Burns’ Naked Trader strategy, but its declining EPS growth last year means it just misses. Nevertheless, the fact that the stock comes close to qualifying for a demanding ‘growth at a reasonable price’ screen is indicative of its apparently robust fundamentals and positioning as a value stock that could be worth further investigation by investors that like the value / momentum / dividend story.

 


Filed Under: Investing,
There's value in the stock market
but do you know where to look?

Get the most concise synopsis of everything that's been proven to work in value investing. If you like your stocks cheap you've found a treasure trove distilled to under 70 pages.

  • How to find ultimate Bargain Stocks with Ben Graham
  • How to spot Turnarounds and avoid Value Traps
  • From Graham to Greenblatt via Piotroski & Lakonishok
  • How to value stocks and set a margin of safety

Soon to be retailing for an RRP of £14.99, for a limited time only,
you can get your copy free by joining our 35,000 strong mailing list.

*By signing up you'll be joining our mailing list
no junk, no spam - just great content like this example.


Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


Do you like this Post?
Yes
No
6 thumbs up
0 thumbs down
Share this post with friends



Greggs plc is a bakery retailer in the United Kingdom. The Company has approximately 2,000 shops, supplied by approximately 10 regional bakeries. It sells a range of fresh bakery goods, sandwiches and drinks in its shops. In addition it also provides frozen bakery products to its wholesale customers. The Company’s operations are managed through an integrated supply chain, with over seven retail regions. more »

Share Price (Full)
578p
Change
-1.0  -0.2%
P/E (fwd)
14.1
Yield (fwd)
3.5
Mkt Cap (£m)
585.7

JD Sports Fashion Plc is engaged in the retail and distribution of branded sportswear, fashionwear and outdoor clothing and equipment. It operates in three segments: sport retail, which includes results of sport retail trading companies JD Sports Fashion Plc, John David Sports Fashion (Ireland) Limited, Chausport SA and Duffer of St George Limited; fashion retail, which includes results of fashion retail trading companies Bank Fashion Limited and RD Scott Limited; Outdoor retail, which includes the results of the outdoor retail trading company Blacks Outdoor Retail Limited, and distribution businesses, which includes results of distribution companies Topgrade Sportswear Limited, Nicholas Deakins Limited, Canterbury Limited (including global subsidiary companies), Kooga Rugby Limited and Nanny State Limited. more »

Share Price (Full)
430p
Change
-2.0  -0.5%
P/E (fwd)
12.4
Yield (fwd)
1.9
Mkt Cap (£m)
840.9

J Sainsbury plc is engaged in grocery and related retailing. The Company is organized into three segments: Retailing (Supermarkets and Convenience); Financial services (Sainsbury’s Bank joint venture), and Property investments (The British Land Company PLC joint venture and Land Securities PLC joint venture). As of March 17, 2012, the Company operated over 1,000 stores comprising 572 supermarkets and 440 convenience stores. Investment properties held by the Company are those contained within its joint ventures with Land Securities Group PLC and The British Land Company PLC. In October 2011, the Company acquired online entertainment company, Global Media Vault Limited.Effective January 31, 2014, J Sainsbury PLC acquired the remaining 50% interest in Sainsbury's Bank PLC. Effective August 07, 2014, J Sainsbury PLC acquired a remaining 36% interest in Anobii Ltd. more »

Share Price (Full)
232.8p
Change
-8.8  -3.6%
P/E (fwd)
9.3
Yield (fwd)
5.6
Mkt Cap (£m)
4,668



  Is Greggs fundamentally strong or weak? Find out More »


1 Comment on this Article show/hide all

Isaac 23rd Apr '12 1 of 1
3

Ben Hobson - Just wanted to say thanks for your articles, I think your a credit to the Stockopedia team and it is a joy to read your articles, please keep up the good work.

thank you

| Link | Share

What's your view on this article? to Comment Now

 
 
You are feeling neutral

Use the £ sign in front of a ticker to turn £VOD into Vodafone PLC

You can track all @StockoChat comments via Twitter


About Ben Hobson

Ben Hobson

Follow

Strategies Editor at Stockopedia. Writer, Editor & Investment Strategies Analysis. Test driving and telling the world about the awesome stock market investing tools and resources at Stockopedia. Helping Stockopedia subscribers take control, invest with confidence, beat the market and sleep soundly at night. more »



Stock Picking Tutorial Centre



Stock Picking Simplified

Stockopedia takes your stock picking to the next level with cutting edge Stock Reports & Screening tools.


Get started
or Take a Tour to find out more.