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Greggs plc Soars As Profits Set To Beat Expectations

greggs_shopGreggs (LSE: GRG) shares rocketed 13% higher when markets opened this morning, after the firm said that full-year profits would be “materially ahead of our previous expectation”.

The firm says that booming sandwich sales and upgrades to its coffee and cake offerings helped drive a 5.4% rise in like-for-like sales during the third quarter.

What can we expect?

When companies refer to ‘expectations’, a good starting point is the latest consensus forecasts for the firm’s earnings that year. Some companies do provide their own forecasts, but most, like Greggs, rely on ‘guiding’ the market, using outlook comments in their trading updates.

The latest consensus forecasts for Greggs indicate that the baker was expected to report earnings per share of 35.2p this year, with a dividend of 19.6p.

At last week’s closing price of around 537p, that equated to a 2014 forecast P/E of 15.3 and a prospective yield of around 3.6%.

As I write on Monday morning, Gregg’s shares have risen by 13%, to around 610p. If we assume that Greggs will maintain a similar P/E rating on its revised profit outlook, then we could now be looking at earnings per share of around 39p this year.

Will the dividend rise, too?

Greggs’ earnings per share may rise ahead of expectations this year, but will the firm increase its dividend payout?

I’m not sure it will: in Greggs’ interim results, in July, the interim dividend was unchanged. Greggs said that it planned to maintain its existing payout level until the dividend was covered twice by earnings.

A dividend cover level of 2 would require earnings per share of 39p, so in my view it’s likely to be next year before shareholders get a significant pay rise from Greggs, especially as the firm is continuing to spend steadily on store refits and new stores.

Is Greggs still a buy?

Greggs’ share price has risen by 40% this year, and the firm’s valuation looks reasonably full, in my view.

Greggs said today that like-for-like sales growth in the final quarter of the year is expected to be more modest than during the third quarter, thanks to a strong comparative period at the end of last year.

I wouldn’t rush to buy on today’s news: in my view, Greggs’ shares are no longer especially cheap, and the firm’s share price could drift lower again, once the initial excitement of today’s profit upgrade wears off.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.