Shares of high street baker Greggs (LSE: GRG) rose by nearly 5% this morning, after the company reported a 3.7% rise in like-for-like sales over the last three months. Although this was lower than the 6% LFL growth reported for the same period last year, it’s a solid achievement given tougher high street trading conditions.
Greggs’ decision to sell more salads and coffee seems to be helping the firm broaden its appeal. However, this progress does little to change the fact that the firm’s shares are down by 16% so far this year. Is Greggs’ long run of growth finally coming to an end?
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Possibly. The latest broker forecasts indicate that Greggs is expected to generate adjusted earnings of 58.3p per share this year, an increase of 4.5% from last year’s figure of 55.8p per share. Earnings growth in 2017 is expected to be about 7.5% per share.
In my view, these figures may not be high enough to justify Greggs 2016 forecast P/E of 18. Greggs’ PEG ratio is currently 2.5, well above the threshold of 1.0 below which growth stocks are often considered cheap.
A better choice for growth?
Like Greggs, newsagent WH Smith (LSE: SMWH) has found it can increase profits on the same products by selling them at travel locations like railway stations.
WH Smith has made a big success of this strategy. Indeed, investors were becoming concerned that the group’s high street stores could become a drag on profits. However, Smith’s latest results showed that profits from high street stores rose by 6% to £53m during the first half of this year.
City analysts were encouraged by these results and bumped up their forecasts for Smith’s 2016 earnings by nearly a penny, to 95.5p per share. Earnings are expected to grow by 11% this year, and by 7% next year.
However, I suspect that this growth is already priced-into Smith’s shares, which trade on a 2016 forecast P/E of 17.5 with a yield of 2.6%. I’d rate the shares as a hold, rather than a buy.
Does founder’s exit clear way for gains?
Simon Nixon, the founder of Moneysupermarket.com Group (LSE: MONY), has spent the last few years gradually selling his stake in the firm. Mr Nixon stood down as a director in December, and in March sold his remaining 6.9% stake in Moneysupermarket.com.
Although founder share sales are often a concern, in this case Mr Nixon’s exit could actually be good news for shareholders. His steady stream of sales meant that big institutional buyers wanting to invest in the firm could buy outside the market and avoid pushing up the firm’s share price.
This overhang of unsold shares has now been cleared. Anyone wanting to invest will need to buy in the market. This could provide additional support for Moneysupermarket shares, which are down 15% so far this year.
However, with this stock currently changing hands for 20 times 2016 forecast earnings, I’m not sure how much upside can be expected. Although Moneysupermarket generates a lot of cash, growth is slowing. Earnings per share growth is expected to fall below 10% in 2017, down from a five-year average of about 40%.
Moneysupermarket may be in the early stages of going ex-growth and becoming an income stock. If I’m right, then the shares may have further to fall.