Greggs @ 460.9p, +0.9p (+0.2%)
So who's for a sausage roll then?
Not, it seems, Kennedy "Ken" Mckeiken - CEO of Greggs since August 2008, who has quit the high street baker for a position at Brakes Group (http://otp.investis.com: Board Change).
Seems abrupt to me, and concerning, to see a Chief Executive set the company on a strategy but not seeing it to fruition particularly when it includes new elements and strands that are not part of the company's perceived core strengths e.g. Coffee shops, and frozen food, as opposed to baking and distribution at point of sale.
For many years now I have kept an eye on Gregg's inexorable advance armed with "non VAT" sausage rolls of course.
Its steady, but sure, growth has rewarded shareholders and seen the shares advance to a previously stratospheric price that approached £40 before splitting with a 10 for 1 distribution in 2009.
That advance has also continued into its current range bound trading between 460p and a 52 week high of 558p which reflects the simple strengths of the company and the loyalty of its customers through the lengthy recession and periods of high inflation.
With little or no growth forecast over the next 2 years (2012 and 2013), the shares, at 460.9p, trade reasonably on a forecast 11.7 and 11.1 times earnings.
At £19.51m, the company's cash balances have been largely flat for the last 2 financial years but with no debt to speak of, the company has no interest payments to make and the cash position is just that, net cash.
At 74.55p: 2011, the cashflow per share is comfortably higher than the adjusted earnings per share of 39.5p which reflects the advantages and nature of what is effectively an immediate cash for product business (excepting the new frozen food experiment which ties up cash in stock for a delayed payment).
This traditionally strong cashflow, no interest, and net cash position, gives the company financial flexibility to invest and, as mentioned, the company has embarked on a strategy which builds on the traditional store opening/closing programme, and investment in newer technology, with new experiments in coffee shops, open bakery formats, and frozen food sold through Iceland.
Those strengths aside the company's margins are tight though, with 8.65% achieved through 2011 which seems to mark it as a pile it high and sell it cheap type of business, traditionally at least.
But the strategy has possibly gone some way to utilising that strong cashflow and I can see increasing levels of capital investment and, in turn, depreciation.
One element of the strategy, frozen food, albeit at a small level will also reduce cashflow as a matter of course, as it involves preparing product for transport, store stocking, and sale. This has the twin effect of tying up cash in stock but delaying payments received as well.
The CEO has spoken positively about the experiments in the latest interim statement (INTERIM MANAGEMENT STATEMENT FOR THE 14 WEEKS TO 6 OCTOBER 2012), but it is surely too early to tell if the company can establish brand strength in these new niches and deliver sustained revenues beyond the novelty phase.
Worrying then that the CEO has apparently jumped ship.
Investor returns have come from the steady year on year appreciation in the share price in tandem with a dividend (forecast to be 4.1%), which, using next years forecast, has increased 44% in five years but has also been grown in line with earnings with a maintained cover of around 2 times.
But doubts over growth momentum (due to recession and raw material inflation), and the strategy have kept me from investing at the current level despite the shares seeming to be near the bottom of the current trading range.
I will also say it again, but it does concern me when management moves away from the core strengths that they are recognised for. Particularly when it usually seems to herald a spending of the family silver (Morrisons is on a seemingly similar path).
In Greggs case this is now further compounded by the unexpected change at the top so it will be very interesting to see where the new CEO will come from, and whether the current course is maintained.
It will also be interesting to get a view of the financials for the full year (2012), when they are published on the 14 March 2013, and what the cash, cashflow per share, depreciation, and capital spend, trends look like, particularly if the company can't identify revenue growth from the new investments.
So despite my liking of the Greggs brand and its success to date, I have a few too many question marks to invest in the company just yet (unless they become cheaper still of course).
Related article links:
- http://otp.investis.com: Board Change
- http://corporate.greggs.co.uk/assets/Uploads/Investor-analyst-visit-October-2012-final.pdf
- http://corporate.greggs.co.uk:GREGGS plc INTERIM MANAGEMENT STATEMENT FOR THE 14 WEEKS TO 6 OCTOBER 2012
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