MARKET COMMENT
Bread & Butter Shares

By David Kuo (TMFDragon)
March 11, 2004

The humble sandwich has come along way from the Earl of Montague's slice of roast meat between two pieces of bread. It enabled the fourth Earl of Sandwich to eat on the hoof as he hopped from one gambling establishment to another.

Two hundred and fifty years later, sandwiches now come in all different shapes and sizes. Wraps, hot and toasted Paninis, bagels, clubs and subs are just a few of the varieties on offer.

The expansion in the types of sandwiches in Britain has grown hand-in-hand with the explosive growth in the sandwich market itself. In 1996, the UK sandwich market was worth £1.9b, and just six years later it had grown by 47% to £2.8b. Clearly, any sector that is expanding at a compound rate of 7% per year must be worth a closer look from an investment perspective.

In the UK, over 1.8 billion sandwiches are purchased each year, and about a quarter of these are sold through multiple retailers such as Boots (LSE: BOOT) and Sainsbury (LSE: SBRY). The rest are sold through workplace canteens, sandwich bars and coffee shops that include Benjy's, with a turnover of £30m, and Prêt-a-Manger, whose annual revenue is £77m (McDonald's (NYSE: MCD) owns a third of Prêt-a-Manger.)

In terms of size, Greencore Group (LSE: GNC) has the biggest single slice of Britain's sandwich market. It turns out 3m sandwiches a week, accounting for 9% of the market by volume. Its clients include the major supermarkets, high street chains, petrol forecourts and convenience retailers.

In this article, Ireland's Greencore was identified as a share that could be worth a punt. At that time Greencore shares stood at 201.5p, and today the shares are worth 10% more at 221p. At this price the company is valued at 10 times earnings, and yields 3.8%, which does not look too demanding.

Just a stone's throw away from Greencore's Manton Wood sandwich factory is Solway Foods, which is now owned by Northern Foods (LSE: NFDS). Solway makes sandwiches and sushi, principally for Tesco (LSE: TSCO). Solway had revenues of £68m last year, which is bread crumbs in comparison to Northern Food's total sales of £1.4b. However, the company expects to double production capacity by extending its manufacturing facility in Nottinghamshire.

Northern Foods was mentioned in connection with tasty investments in the chilled foods sector in this article. Since then, the shares have appreciated 10% to 158p, valuing the business at 11 times prospective earnings. The forecast dividend yield of 5.7% still looks an attractive filling for hungry high-yield hunters. 

It is worth mentioning that any sector that exhibits fast growth coupled with low barriers to entry is bound to attract severe competition. In the UK, other significant players include Upper Crust, which is owned by Compass Group (LSE: CPG), and Subway, the world's largest submarine sandwich franchise. Allied Domecq (LSE: ALLD) is also planning to introduce its well-established American brand Togo into Britain.    

In fact, Greggs (LSE: GRG), the 1,200-strong sandwich chain warned recently that there are some signs the growth in the sandwich market may be slowing. This is certainly worth bearing in mind. However, the market has perhaps factored in that slower growth by assigning lower valuations to this sector. Greggs, at 3,401p, is valued at 14 times prospective earnings and yields 2.6%.

Whether the sandwich market will turn into toast is debatable. But with generous yields on offer investors should still be able to earn a decent crust from these shares.

The writer has a beneficial interest in Allied Domecq.