Today’s results from high-street baker Greggs (LSE: GRG) show that the company has made a superb turnaround from just a few years ago. Back then, Greggs seemed to be struggling for direction, with its strategy of moving into frozen products and upmarket coffee shops seemingly showing that it lacked a clear strategy. However, its full-year results show that Greggs is a business that is delivering excellent performance at the present time.
A Record Year
With pre-tax profit rising by a whopping 41%, 2014 was a record year for Greggs. A key reason for this was investment in the quality of its products, and also in the ordering experience for customers, with Greggs implementing a far-reaching change programme that seems to be making a real difference. Furthermore, Greggs is also being ruthless when it comes to its estate, with 71 stores being closed during the year (and 50 opened) as it seeks to become a leaner and more efficient business.
Furthermore, Greggs is forecast to continue to deliver strong performance moving forward. For example, it is expected to increase its bottom line by 7% in the current year and by a further 6% next year, which is roughly in-line with the growth rate of the wider index.
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Valuation
The problem, though, is that much of Greggs’ future potential seems to already be priced in. For example, it has a price to earnings (P/E) ratio of 19.6, which is considerably higher than the FTSE 100‘s P/E ratio of around 16. In fact, it equates to a price to earnings growth (PEG) ratio of 2.7, which does not indicate that Greggs offers good value for money at its current price level. As such, while its shares have performed extremely well in the last year (up 75%), their future performance could disappoint.
Sector Peer
Of course, sector peer Morrisons (LSE: MRW) is in a very different position to Greggs. It is yet to commence its turnaround plan, with the company having just appointed a new CEO and being in the midst of reporting very disappointing top and bottom line figures. However, this is a similar position to that in which Greggs found itself a few years ago and, moving forward, Morrisons could deliver its very own turnaround plan – especially with the UK consumer outlook being the brightest it has been since the start of the credit crunch.
And, unlike Greggs, Morrisons’ future performance does not appear to be priced in, with it having a considerable margin of safety. For example, Morrisons trades on a P/E ratio of 16.5 and, with its bottom line forecast to grow by 18% next year, this puts it on a PEG ratio of just 0.7. That’s far more appealing than Greggs’ higher PEG ratio of 2.7 and shows that, while recent performance may suggest otherwise, Morrisons could prove to be a better investment than Greggs at the present time.
