Gamble of the week: bakery chain with secure yield
By
Paul Hill Mar 20, 2009
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Greggs is one of Britain's few retail success stories, run on the solid principle of providing tasty food at low prices. It started out in the 1930s as a family business on Tyneside, and since then has grown to become one of the UK's top bakeries. It has more than 1,400 shops nationwide, specialising in takeaway breads, sandwiches, pies and pasties – serving over five million customers a week.
Greggs (LSE:GRG)
At its full-year results, the chain said it was benefiting as thrifty diners trade down from trendy coffee shops, purchasing its 99p sandwiches and £1.20 espressos instead. This is encouraging on two fronts. Firstly, that the group can still make a decent 7% return at these knock-down levels, and secondly, that cash-strapped consumers can buy lunch at one of its stores so cheaply. This tried and tested formula seems to be working. For instance Uniq, the food supplier to M&S, recently said that the public were giving up expensive Tuscan focaccias in favour of savoury sausage rolls. This year the chief executive, Ken McMeikan, expects "marginally positive" like-for-like revenue growth and rising profit margins as lower commodity, rental and energy costs kick in. And there are big savings to be made from harmonising its product range, such as standardising quality, improving central purchasing and leveraging its national advertising campaigns.
The City is penciling in sales and underlying earnings per share of £654m and 307p respectively, putting the shares on an undemanding p/e of 11.9. The group is also debt-free and pays a reasonably secure 4% yield (which has been hiked every year for the past 24). So the shares look good value. Of course, there's no such thing as a free lunch. Greggs is exposed to the British weather, and so can be hit by heavy rain as punters stay indoors. It is also sensitive to weakening footfall in shopping centres and rising unemployment, especially given that a large portion of its turnover comes from hungry office workers.
But the economy will have to get much worse before the man on the street cannot afford a 55p sausage roll. With its strong-value brand, good cash generation and robust balance sheet, Greggs should survive even the toughest of downturns.
Recommendation: speculative BUY at £36.45
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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