Buyers feast on Greggs shares tipped to rise 33%

They've struggled to sell enough sandwiches and pies this year, but latest results bring better news, reports Graeme Evans.

Pies and sausage rolls were back on the menu for investors today as the once prolific shares in food-to-go chain Greggs showed signs of a return to form.

A decent 3.2% rise in like-for-like sales in the 13 weeks to the end of September provided the trigger for today's welcome 5% surge in the FTSE 250 stock, which follows a long period spent in the doldrums in 2018.

Given the way things were going for shares since a profits warning in May, our Trends and Targets analyst Alistair Strang had warned last week that the chain was in danger of reversing all the gains seen since 2013.

• A mid-cap share flashing red

The stock stood at 400p five years ago before its impressive run to a peak of 1,400p at the end of 2017. Since then, however, investors have appeared determined to give up on Greggs and its historic 3% dividend yield.

That's despite the best efforts of chief executive Roger Whiteside, who has been working to broaden the appeal of the chain, with the launch of healthier ranges such as Mexican bean wraps or low calorie soups.

The Greggs estate is also much less dependent on the high street, with more shops now found in transport locations or near to places of work.

But these improvements, coupled with the benefits of investment in the supply chain or back office systems, are still just as vulnerable to the British weather.

The Beast from the East was blamed for the May profit warning, while a long spell of hot weather over the summer made trading patterns hard to predict.

Helped by a new drinks range and the popularity of focaccia-style pizzas, Greggs has emerged from the most recent quarter with its full-year expectations in tact. Today's performance was made even more impressive by being up against toughening benchmarks from a year earlier.

This impressed analysts at Edison, who said Greggs had passed this summer's "scorch test" thanks to the recent changes in its strategy.

Source: TradingView (5-minute share price since 3 October)      Past performance is not a guide to future performance

They said: "More food-on-the-go locations attracted new customers such as motorists, many customers in existing retail locations are now workers rather than shoppers, and the brand has expanded into new day parts such as breakfast and late afternoon, which were cooler.

"Menu development also meant cold, lighter products were available."

Edison has retained its 1,360p valuation and said that today's update should help to challenge "out-of-date assumptions" about Greggs.

The shares trade on a 15.3x 2019 price earnings multiple, as well as a 6.6x enterprise value to underlying earnings. Edison said the latter was a 37% discount to its peer group.

They added: "We also note that it is a 60% discount to the 16.4x earnings based valuation at which Costa has been bought by Coca-Cola."

UBS analyst Heidi Richardson is also positive on Greggs, with a price target of 1,400p. She added: "We believe the return to above 3% like-for-like sales despite tough comparisons and the impact of the hot weather early in the quarter is testament to the strength of the Greggs business."