16 Jan Why I’d buy this growth monster over turnaround stock Interserve plc
Bakery chain Greggs (LSE: GRG) is on a roll again after publishing its fourth-quarter trading update, its share price up 2.5% at time of writing. Should you sink your teeth into it?
Pie in the sky
Greggs is now up 33% over the past 12 months, and a whopping 189% over five years. Its image has transformed as it adds healthier options to its traditional spread of buns, pies, baps and sausage rolls. The company describes itself as the leading bakery food-on-the-go retailer in the UK, with more than 1,850 outlets, and today’s results are headlined A year of good growth.
Total sales rose 7.4% in the 2017 financial year, with company-managed shop like-for-like sales up 3.7%. It opened 131 new shops in the year, with 41 closures. Full-year results are expected to be in line with previous expectations.
Whiteside of life
Chief executive Roger Whiteside hailed 17 consecutive quarters of like-for-like sales growth and looked forward to a positive year ahead: “2018 will be a record year for investment in our supply chain and we intend to increase the rate of new shop openings as we continue to grow Greggs as a leading food-on-the-go brand.”
Festive bakes, fresh-baked mince pies, hot sandwiches, gluten-free Balanced Choice soup, caramel latte and focaccia-style pizza all proved popular, as the company absorbs changing food tastes into its range. White warned that industry-wide cost pressures will continue in the year ahead, but at a lower level than in 2017.
I have previously declared myself a fan of this piping hot growth stock and see no reason to change my stance. The forecast yield is 2.7%, with dividend cover of 1.9. Return on capital employed is a healthy 29.8%. Earnings per share (EPS) are forecast to grow 7% in 2018 and 9% in 2019, lifting the yield to 3.1%. My only quibble is that its strong prospects are reflected in the price, with the stock trading at a forecast 19.8 times earnings, on a price-to-earnings (PEG) ratio of 2.9.
International support services and construction company Interserve (LSE: IRV) wishes it could boast of 17 consecutive quarters of EPS growth. Its stock trades 65% lower than it did a year ago, as the market punished a series of profit warnings, amid fears that it might breach its banking covenants.
However, this falling knife has flashed upwards over the last month, rebounding 45% from 83p to today’s 120p. It was helped by its update on 10 January, which reported that 2018 operating profit should be ahead of market expectations, while constructive discussions with lenders over longer-term funding are progressing, the results to be announced “in due course“.
Interserve also said that year-end net debt would come in at roughly £513m, after peaking in the first half. This is undoubtedly a tempting turnaround play, although I would urge caution as the debt is still pretty hefty and will take time to erode.
Like many, I am particularly wary of falling stocks right now, and was happy to see that I warned investors to stand well clear of Carillion last July. Some may be tempted by Interserve’s forecast valuation of just 3.4 times earnings and PEG of just 0.2. EPS are forecast to fall 54% in 2017, but then rebound 23% in 2018 and 33% in 2019. Tempted? Too risky for me, maybe not for you.
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Harvey Jones 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.