Worth tucking into Greggs shares?

Cooking up its thirteenth consecutive quarter of sales growth, full-year results from Greggs are set to beat expectations once again. The high street baker has been hard at work transforming its stores and ranges, and the overhaul continues to pay off. Up over 7% at one stage to its highest since early October, some in the City are talking Greggs shares up another 16%.

An insatiable appetite for mince pies and food-on-the-go drove like-for-like sales from company-managed shops up 6.4% in the final three months of the year, keeping up a run of consecutive quarterly growth that stretches back over three years.

Even stripping out the key two-week Christmas period, like-for-like sales rose 4.1%. Total sales rose 7% in 2016, with like-for-like sales from its own shops up by 4.2%.

Greggs has been hard at work overhauling its image from the sausage roll-and-pasty hangover cure into a modern food-on-the-go hot spot. Now offering a Balanced Choices range and popular hot foods like burritos, weary shoppers will soon be able to warm their hands around a Vanilla Latte or Fairtrade Peppermint Tea.

As well as updating its food range, Greggs has also refurbished 208 shops into a bakery food-on-the-go format, opened 149 new stores and shut 79 - face lifts should continue at a similar pace this year.

The modernisation of Greggs isn't over yet, however, and a new replenishment system - tipped to go nationwide in 2017 - should deliver benefits over many years.

Greggs is also trialling a delivery service, which, with a £20 minimum spend, is aimed at office workers within 0.4 miles of its Cheapside and Eastcheap branches in the City of London.

"The modernisation of Greggs remains far from complete, with profits likely to benefit from the reshaping and expansion of its shop estate, IT upgrades and distribution network transformation," explains Investec Securities analyst Alistair Davies, who'll be pleased to know he's well within Greggs' delivery catchment area!

To celebrate, he's upgraded his 2016 profit forecasts by 2% to £80 million, giving earnings per share (EPS) of 61.2p.

Restricted margins

As the squeeze on income growth tightens, Greggs has warned that industry-wide cost pressures could restrict margins in 2017. Davies agrees, so he's maintained his pre-tax profit guidance at £81.9 million for this year.

With EPS of 63.4p and a 31.7p dividend pencilled in, the shares are currently trading on 16 times forward earnings and yield 3%.

Davies thinks Greggs can recover most of 2016's lost ground, giving a 1,225p target price"Greggs in our view is a business capable of sustainable growth through roll-out and self-help as it modernises its operating practices, backed by strong cash generation and a healthy balance sheet," adds Davies.

Investors had a sweet tooth for Greggs, with its share price lurching from around 390p in the summer of 2013 to over 1,300p two years later. Last year was trickier and it slumped to a post-referendum low of 869p.

Davies reckons Greggs can recover most of 2016's lost ground, slapping a 1,225p target price on the shares. This would put them on a 2017 price/earnings (PE) multiple of 19.3 times.

For the record, the team at UBS also rate Greggs a 'buy' and advise chasing them up to 1,200p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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.