Consumer-facing takeaway food firms Just Eat (LSE: JE) and Greggs (LSE: GRG) should benefit from rising disposable incomes. In this article I’ll look at today’s final results from both companies.
I’ll also ask whether Amazon’s new UK food supplier, Wm Morrison Supermarkets (LSE: MRW), could prove a smart buy.
Greggs
Sales at high street baker Greggs rose by 5.2% last year, as a continued focus on café-style takeaway food attracted more customers.
Today’s results show that Greggs’ adjusted pre-tax profits rose by 25.4% to £73m last year. Shareholders have been rewarded with a 30% hike in the ordinary dividend, which is now 28.6p.
Greggs shares are up by more than 10% at the time of writing, and are now worth 134% more than they were two years ago.
Can these gains continue? I suspect they might. Greggs’ management has a habit of under-promising and over-delivering. This is an attractive trait because it reduces the chance of disappointments, which can skewer a company’s share price.
According to today’s results, Greggs expects to deliver “a further year of underlying growth” in 2016.
Before today, City forecasts were suggesting a 5% rise in earnings and a flat dividend. This seems reasonable enough, if not cautious. Further gains may be possible.
Just Eat
Online takeaway ordering service Just Eat has grown rapidly since its flotation in April 2014. Today’s results show that sales rose by 58% to £247.6m last year. The number of takeaway orders received rose by 57% to 96.2m.
Just Eat is quite an attractive business because its increasing scale is making it more difficult for competitors to gain a foothold. According to the firm, Just Eat is market leader in 12 out of the 13 countries in which it operates.
Cash generation is also good — net operating cash flow rose by 95% to £74.2m last year. Of this, £57.1m dropped through to free cash flow, excluding acquisitions. The firm’s reported operating margin also rose last year, from 12.1% to 14%.
However, Just Eat is expensive. The shares trade on 61 times 2015 adjusted earnings, and 43 time 2016 forecast earnings per share. Although Just Eat could become dominant in its sector, like Rightmove, investing at such a high valuation does carry an above-average risk of disappointment.
What about Morrisons?
Morrisons surprised investors yesterday with the news that it had secured a coveted deal to supply Amazon with groceries for home delivery. It’s a good deal for Morrisons, which has a sizeable food manufacturing business. The Amazon deal means that spare manufacturing capacity resulting from store closures can be used.
Morrisons will sell at wholesale prices to Amazon, but should still make a small profit for itself. None of the UK’s other supermarkets could do this, as they don’t produce their own food.
The Amazon deal should be a source of growth. Even without this, Morrison’s recovery appeared to be going well. The firm has generated enough free cash flow to reduce debt and maintain a reasonable dividend, while also funding a turnaround in its stores.
I don’t expect fireworks from Morrisons over the next few years, but I do expect steady growth. Next week’s final results should tell us more, but in the meantime I plan to hold my shares.
