The Motley Fool

Is Greggs plc A Better Buy Than Wm. Morrison Supermarkets PLC?

Today’s trading update from Greggs (LSE: GRG) is positive and shows that the company is making encouraging progress. For example, in the 24 weeks to 13 December, like-for-like sales have risen by a hugely impressive 5.2%, with Greggs stating that the weather has generally been favourable in driving more people to its stores. Its store refurbishment programme, as well as extended ranges of coffee and food items, have also boosted sales.

As a result, Greggs now expects to beat previous guidance for the full year, with shares in the company being up around 5% today due to this news. What makes the figures all the more impressive, though, is that the fourth quarter of 2013 was a strong quarter for the business, so to improve upon it this time around shows that the company is making excellent progress.

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Strategy Shift

Clearly, Greggs has benefitted from a ‘back to basics’ approach in recent months. In other words, it has refocused on its core offering in terms of delivering good value food and beverages, with the company also widening the choices on offer to consumers as well as refurbishing parts of its estate. This approach contrasts with the Greggs of a couple of years ago, when it experimented with higher price point stores and perhaps took one eye off its core business, which led to relatively disappointing results.

Looking Ahead

With Greggs being forecast to increase its bottom line by around 26% in the current year, and by a further 7% next year, its current strategy is clearly working well. This contrasts markedly with the expected performance of General Retail sector peer Morrisons (LSE: MRW), where its bottom line is forecast to fall by 51% in the current year, although growth of 11% is expected next year.

However, when it comes to which stock could prove to be the better investment, the valuation of Greggs seems to hold it back. For example, it trades on a price to earnings (P/E) ratio of 17.3 and, even though it has excellent bottom line growth pencilled in for the next couple of years, this equates to a price to earnings growth (PEG) ratio of 2.3, which appears to indicate that its future prospects are already priced in to its current valuation.

On the other hand, Morrisons continues to trade below net asset value and, with a P/E ratio of 13.8, is perhaps more likely to be the subject of an upward rerating next year. That’s especially the case if the company can post earnings growth of 11% (as the market expects it will) next year.

So, while Greggs is performing extremely well as a business, its current share price appears to include much of its future potential. Although risky, Morrisons could prove to be the better stock moving forward, simply because the market is pricing in yet more disappointment, which may not be quite as severe as many investors believe it will be.

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Peter Stephens owns shares of Morrisons. 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.