The past month has been a bad one for Greencore (LSE: GNC) shareholders. They’ve seen the value of their holding shrink around 30% following a profit warning from the convenience food manufacturer.
But while this has been painful for current shareholders, I believe contrarian investors may find an opportune moment to begin a position in the company at what appears to me to be a bargain valuation.
The cause of the matter
All things considered, Greencore’s profit warning earlier this month wasn’t all that terrible. Management estimates that its full year profits will now be between 14.7p and 15.7p per share, roughly 7% lower than analysts were expecting. On top of this, there was also a further warning about underutilisation at some of its legacy US manufacturing sites that will see the mothballing of one in Rhode Island that contributed a relatively minor 2% of US revenue last year.
In isolation, these two factors make the roughly 30% drop in its share price on the day of announcement seem a vast overreaction. And I believe it’s an overreaction, but disgruntled investors would also be forgiven for losing patience with the management team following continued problem at its old US facilities.
The future appears bright
However, looking out over the long term, I think Greencore is still in great shape. The company’s core UK business is growing by leaps and bounds as it cements its dominant position as the country’s foremost manufacturer of own-brand sandwiches, sushi and other food-to-go items for grocers. In Q1, sales from the UK side of the business were up a whopping 8.7% year-on-year, excluding the effects of a small acquisition, and up 9.2% at reported levels.
Then, in the US, the company finally has the scale, national reach and customer relationships to build a successful, profitable business, thanks to the acquisition of Peacock Foods. This part of the American business, which is now the far larger and core portion of the business there, is growing very nicely.
In Q1, overall American sales were up 5.1%, driven by a 7% increase in volumes as new contracts rolled in. And over the next two years there’s considerable further growth potential as the group has a bevy of potential contracts with consumer packaged goods firms in its pipeline. While management now expects these contracts to benefit the group starting in the first half of fiscal year 2019, rather than this year, they still sound confident in landing them.
Time to jump in?
And in the meantime, Greencore’s balance sheet is still in rude health. Net debt at year-end was 2.4 times EBITDA following the Peacock acquisition and the profit warning didn’t stop management from disclosing that they still expect leverage to reduce to around 2x by year-end.
With the business still generating considerable positive cash flow, the UK division delivering significant growth and the core US business well-positioned for long term growth, I see plenty to like about Greencore. And with its shares now offering a 4.28% yield based on last year’s 5.47p dividend and a valuation of only 9 times the lower-end of management’s EPS guidance, I believe other long-term investors may find now a great time to buy shares of Greencore, like I have.
