Shares of bakery food-to-go retailer Greggs (LSE: GRG) were 7% higher when last seen on Tuesday morning, after the company said sales rose 5.2% to £465m during the first half of the year.
The firm’s shares fell 15% in May when the company warned on profits after seeing sales slow when the late winter weather reached into March and April. Investors were concerned that with many shoppers deserting the UK’s high streets, Greggs’ stores could suffer.
But today’s results appear to confirm that this was a one-off problem caused by the weather. Management said the bakery chain saw “resilient trading” and “continued growth in developing strategic categories,” such as breakfast and hot food options during the first half.
Underlying operating profit for the six months was £25.7m, down from £27.6m for the same period last year. But chief executive Roger Whiteside said he expects underlying profit for the full year to be “at a similar level to 2017.”
Fill your belly with these
Whiteside is a veteran of the food-on-the-go industry. Under his management, Greggs has diversified into breakfast food, coffee and healthier options, such as salads. His most recent move is to target evening food with a £2 offer for a slice of pizza and a drink after 4pm.
This strategy has been very successful. Earnings have risen by 50% since 2013 and the group’s return on capital employed of 23% is also very impressive. Cash generation has been consistently strong and the group has traded with a net cash balance for some years now.
I expect this business to return to growth over the next few years. The shares currently trade on 16 times forecast earnings with a 3.3% yield. I’d rate them as a long-term buy for income and growth.
Another business I rate highly for its profitability and quality is FTSE 250 online trading specialist IG Group Holdings (LSE: IGG).
In its annual results last week, IG said that revenue rose by 16% to £569m during the year to 31 May. Operating profit rose 32% to £281.1m, giving an operating margin of 49%. That’s a superb figure.
This business has always been highly profitable, but investors have been concerned that new EU regulations restricting the amount of leverage available to retail customers would crush profits.
The impact of these changes seems likely to be more limited than was first expected. IG said that historic revenue would have been around 10% lower under the new rules. Sure enough, revenue is expected to fall by about 7.5% this year, leading to an expected 15% drop in earnings.
Return to growth
However, the group’s focus on high-value professional clients will limit the impact of the changes. And management expect profits to start rising again in 2019/20, thanks to continued expansion and new leveraged products that will be compliant with the EU rules.
I don’t have too many concerns about IG’s business, which has a reputation as one of the best quality operators in this sector. Cash generation is consistently good and the stock offers a forecast yield of 4.5% that should be covered by earnings. I’d be happy to buy and hold this stock in a long-term income portfolio.
Roland Head 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.