Convenience-food producer Greencore (LSE: GNC) has released a strong first quarter update today. It shows the company’s sales have risen by 17.1% in the 13 weeks to 30 December 2016. This suggests the convenience food sector remains a growth space even as supermarkets continue to report food price deflation. But since shares in Greencore have risen by over 5% today, are they now overpriced given their future outlook?
While the company’s reported sales growth was impressive, at least some of this was due to the acquisition of The Sandwich Factory in July 2016. On a like-for-like basis, sales grew by 9.1%. This is still hugely impressive and shows the company’s strategy is working well. In fact, a number of business wins were rolled-out during the quarter, while the Food to Go business benefitted from robust category growth.
This level of growth could continue over the medium term, as investment in future prospects remains high. Construction of the final new facility in Northampton has been completed, while in Prepared Meals, Greencore is investing in capacity and capability within its ready meal facilities, in order to support renewed contracts within that business. And with the addition of operations in Seattle and a weaker pound pushing US sales up by 31.2%, the outlook for the wider business is upbeat. That’s especially the case since the integration of recently acquired Peacock Foods is performing well.
As mentioned, UK supermarkets such as Sainsbury’s (LSE: SBRY) have reported food price deflation in recent years. However, this does not appear to be affecting Greencore’s financial performance. Looking ahead, it is expected to record a rise in its bottom line of 2% this year and 9% next year. This compares favourably to Sainsbury’s forecasts, with the retailer expected to report a fall in its bottom line of 16% this year, followed by a further decline of 3% next year.
Despite its upbeat outlook, Greencore trades on a price-to-earnings (P/E) ratio of just 14. When combined with its forecasts, this equates to a price-to-earnings growth (PEG) ratio of just 1.6. This indicates excellent value for money given the geographical spread of the business and its relatively stable business model.
Certainly, it appears to be a better investment proposition than Sainsbury’s in the near term. While the supermarket’s acquisition of Argos could prove to be a sound long term move, in the short run consumer confidence could fall as inflation rises. This could mean that consumers delay purchases of the non-essential items in which Argos specialises. As such, it could act as a drag on Sainsbury’s overall performance in 2017, although in the long run it could deliver improving profitability and investment gains.
Since Greencore has an attractive valuation, a bright future and a sound strategy through which to invest in its growth capacity, now seems to be a good time to buy it. Its shares may not be quite as enticing as they were prior to today’s announcement, but there still appears to be significant upside on offer over the long run.
Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK owns shares of and has recommended Greencore. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.