Greggs plc Surges Higher As Baker Hikes 2014 Profit Forecast

Shares in high-street baker Greggs (LSE: GRG) opened nearly 6% higher this morning, after the firm said that December like-for-like sales rose by 8.2%, and that full-year results would be “above previous expectations”.

60% gain

Greggs has been an impressive investment over the last 12 months, gaining nearly 60% during a period when the FTSE 100 has fallen by 3.5%.

However, Greggs’ shares are no longer cheap — before today, they were trading on a fairly warm 2015 forecast P/E of 17. Investors who’ve ridden the shares from 500p up to today’s price of almost 800p need to decide whether to lock in some profits, or hold on for more.

A closer look

Greggs’ statement today that full-year results will be “above expectations” suggests to me that the firm’s adjusted earnings per share for 2014 will be between 5% and 10% higher than current consensus forecasts.

The most recent consensus figures I can find suggest that Greggs was expected to report earnings of 40.3p per share for 2014. Adding 7.5% to this — the middle of my estimated range — suggests that the firm could report earnings of 43.3p.

This gives a 2014 P/E of 18.4, at the current share price of 795p.

Assuming Greggs increases its final dividend by the same amount, shareholders could be looking at a dividend of 21.5p, giving a yield of 2.7% at today’s share price.

Growth prospects

Greggs’ current valuation makes it clear that the market expects further growth. Before today’s announcement, earnings were expected to rise by around 6% in 2015, with sales growth of around 3%.

The fact that profits are expected to grow twice as fast as sales indicates that analysts believe that Greggs will be able to continue to improve its profit margins, by stripping out costs and benefiting from economies of scale.

Is this realistic?

In its update today, Greggs says that total sales rose by 5.5% in 2014, but this was over a 53 week period, compared to 52 weeks during the previous year. This suggests to me that sales growth in 2014 on a 52-week basis would have been around 3.5%, broadly in-line with forecast sales growth for 2015.

Greggs says that conditions for the first half of 2015 look “encouraging”, but it’s worth remembering that highly-rated shares like Greggs can fall sharply at any hint of a slowdown: now could be a good time to trim your holding.

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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.