Investment Column: Economic woes leave sour taste at Greggs

Robert Walters; Gemfields
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The Independent Online

Our view: Hold

Share price: 464.7p (-10.3p)

Greggs, the bakery chain, added its voice to the growing view that trading is "tough" on the high street yesterday, as it posted a slowdown in underlying sales growth.

For the quarter to 2 October, Greggs' like-for-like sales grew by just 0.2 per cent, as the downturn in consumer confidence took a bite out of sales of its sausage rolls, baps and pasties. This compared to a 0.5 per cent rise in like-for-like sales for the longer 39-week period.

Shore Capital estimates that actual sales volumes fell by 1 to 2 per cent over the period, as the baker has been "active" in recovering higher input costs from commodities, notably wheat, by pushing up prices on certain ranges by between 2 and 4 per cent.

And we don't believe that life will get any easier for the chain of 1,451 outlets over the coming year.

The Government's austerity measures in the public spending review are likely to further impact the confidence of many of Greggs' core customers and footfall on the high street.

That said, there were several tasty morsels to take home from its interim management statement. For instance, the baker's breakfast sales have been "particularly strong", with its bacon rolls being the star performer. The group now feels confident enough to add croissants, pain au chocolat and porridge to its menu.

Perhaps most importantly, its retail expansion remains on track, with a net new 32 new shops opened in the year to date, taking it closer to its goal of an estate of more than 2,000 shops.

While the City reckons that the programme may dent the margin owing to rising opening costs, analysts at Shore expect the impact to normalise through 2011, and has identified scope for an uplift of 100 basis points in margins.

We held Greggs' shares in January at 405p, which was not our finest hour. But while the stock is reasonably priced on a 2010 price-earnings ratio of 12.8 times, we remain cautious on how much upside there is for the baker's shares during a prolonged challenging consumer environment. Hold.

Robert Walters

Our view: Hold

Share price: 291.75p (+21.75p)

The outlook for the UK economy seems a touch dicey, with ongoing fears about the potential for a double-dip recession and the inevitable job losses that will follow it.

While recruitment may not seem the sweet spot in the current climate, the headhunter Robert Walters has been doing very nicely, thank you very much. The group released what analysts called an "encouraging" update yesterday covering the three months to the end of September. The results showed gross profit up from £25.8m a year earlier to £42.5m in the third quarter of 2010.

The company has expanded to Germany and South Korea, and plans to open up a third office in mainland China before the end of the year. Its own headcount has risen from 1,232 to 1,640. The real growth story is in the Asia Pacific region, yet even in the UK trading has been positive, according to chief executive, Robert Walters, "in spite of continued economic uncertainty".

This comes after a tough year in 2009, when profits plunged 90 per cent to £1.3m, although they should return to around £12m this year.

The analysts at Investec rate the management at the group, and believe that the company has "a particularly attractive geographic profile and further strong recovery prospects". It rates the stock at 25.6 times estimated 2010 earnings, and, after the recent run in the shares, we reckon it is fully valued. Hold

Gemfields

Our view: Buy

Share price: 10.5p (+2p)

We all know about the surge of gold prices. But what about emeralds, the stock-in-trade of the aptly named Gemfields?

Yesterday's full-year results showed that the company had sold nearly $20m (£12.6m) worth of emeralds, up from just over $800,000 last year as the market recovered. Emerald prices are still to reclaim pre-crash highs, and that bodes well for the company's stockpile, which has an estimated value of around $16.5m.

The market was clearly impressed by the figures, and the stock had put on 38 per cent by the close. But is it still worth buying?

Yes. Besides the prospect of higher emerald prices, Gemfields is underpinned by what remains a promising valuation. Its net asset value is less than 10p per share, meaning that Gemfields trades at a small, but by no means onerous, premium. The market should give the company more credit as emerald prices rise. Buy.

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