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Is the Greggs share price a falling knife to catch after plummeting 15%?

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It’s not been a particularly pleasant morning for loyal holders of stock in sausage roll server Greggs (LSE: GRG). Today’s cautious trading update from the FTSE 250 constituent – released to coincide with its annual general meeting – has resulted in 15% being wiped from the company’s value. 

Given that the stock was already changing hands on a fairly frothy 19 times expected earnings before today, it may be argued that this price fall was somewhat inevitable.

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Personally, I think this is a great chance to take a position in what remains a fine business.  

Golden opportunity?

As a result of “weaker market conditions” in March and April, sales rose 4.7% over the first 18 weeks of the year, down from 7.4% in 2017. At just 1.3%, like-for-like sales growth at company-managed shops was pretty much only a third of that achieved over the same period in the previous year (3.5%). The latter was also a decline from the 3.2% reported for the first eight weeks of 2018 — something Greggs blamed on a combination of weaker footfall and poor weather.

Despite experiencing a recovery of sales in the first few days of this month, the baker stated that it was “cautious” going forward as a result of uncertainties and that underlying full-year profits would now be “at a similar level to last year“.

While it can sometimes be wise to wait until emotional sellers have dispersed, this is one knife I’m tempted to catch. Greggs is a well-run company with a huge 1,883-store estate that isn’t restricted to high streets, a net cash position and enviable returns on capital. Taking into account today’s fall — and assuming analyst forecasts aren’t changed dramatically — there’s also a 3.2% yield, easily covered by profits.

Buying what others are selling is never easy but I think this could be a very rewarding strategy as far as Greggs is concerned.

Slowing sales

Also reporting today was pub chain JD Wetherspoon (LSE: JDW). Like-for-like sales growth “slowed slightly” to 3.5% over the 13 weeks to 29 April — some of which the company attributed to the early May bank holiday not being part of the period in 2018. Total like-for-like sales growth for the year to date is now 5.2%. 

On an operational level, the firm has opened five new pubs in the current financial year (with one more scheduled before the end of July) and sold 19. It has also spent millions on buying pub freeholds and on buying back its own shares.

Chairman Tim Martin was on predictably forthright form. Likening the EU to “a protection racket,” he took the opportunity to reiterate his belief that the UK should leave the EU’s customs union after Brexit, allowing for taxes on non-EU food and drink imports to be stripped out.  

While many of JD’s owners might agree with him, they may be more concerned by his comment that the company faces “significant cost increases” in the remainder of the financial year relating to business rates, staffing and the introduction of the sugar tax. Mr Martin’s less-than-bullish comments on the effect of the forthcoming FIFA World Cup on trading may have also raised a few eyebrows.

Shares in the firm are up 46% in the last year. Given that they now trade on a not-exactly-cheap (relative to other pub chains) valuation of 16 times earnings and a negligible 1% dividend yield, I’m inclined to think that Greggs looks a far more attractive option at the current time.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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