Investment Column: Hold on to those sausage rolls at Greggs

Fenner; Mears
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The Independent Online

Our view: Hold

Share price: 405p (-10p)

Right across the high street, retailers have been saying they are "cautious" about prospects for sales for the new year. So it was good to hear Ken McMeikan, the chief executive of Greggs, the 1,400-strong bakery chain, saying yesterday that he was "slightly more optimistic" about continuing growth at his stores in 2010.

He has good reason to be upbeat, given that Greggs delivered solid 1.1 per cent growth in underlying sales for the four weeks to 26 December, despite being up against strong comparable sales a year ago. This was driven in part by soaring sales of mince pies and festive bakes, as well as the "nation's favourite" sausage rolls. Also worthy of investors' attention is that Greggs is to crack on with new openings this year, rolling out about 60 net new shops, compared to just 10 in 2009, as part of long-term plans to add another 600.

But there are also reasons why potential investors in Greggs might want to follow other retailers' caution. For example, if consumer confidence takes a knock from a further rise in unemployment or from the Government's actions to reduce the deficit, then footfall on the high street could fall, and footfall on the high street is a key ingredient in Greggs' successful formula.

Furthermore, competition is hotting up as the big supermarkets continue to expand at a frenetic pace and improve their hot food-to-go offers. Christmas showed just how well their part of planet retail is doing.

Some City analysts have only pencilled in a 0.5 per cent uplift in like-for-like sales – which strip out the impact of new space – at Greggs this year, behind that of the listed grocers.

That said, we remain long-term fans of Greggs and its shares, which trade on a 2010 price to earnings ratio of 13, bang in line with the average for the retail sector. But we think 2011 may be a better time to start tucking into its shares. So for now, we say hold.


Our view: Buy

Share price: 188p (+2.1p)

There are a surprising number of interesting businesses nestled under the banner of "mid cap". Fenner is one of them. The company's main business is the production and servicing of high-quality industrial belts which are mainly used in mines. However, its business encompasses quite a few other products ranging from seals to clever medical devices which are increasingly being used, for example, in the treatment of cardiovascular disease when blockages need to be cleared. What is common to all of them is that they are made from polymers, a large molecule made of a long chain of linked units.

A plus point for investors of Fenner is that is business is global. Many businesses of a similar size are much more dependent on Britain. That means it will benefit from a global recovery without having to worry too much about Britain's "issues".

Yesterday's trading statement suggested that things are going well, and the next few quarters could be even better. Fenner should be a big beneficiary from the companies that it supplies seeking to rebuild their inventories – at some, destocking left them dangerously short of what they need.

While the company says it is "cautiously optimistic", the signs suggests that investors could be richly rewarded by getting in now when the shares are not too expensive. They trade at 12.8 times next year's forecast earnings, with a respectable enough yield of 3.5 per cent. We're positive about polymers, so buy.


Our view: Avoid

Share price: 275.5p (-3.25p)

A few months ago we recommended that investors avoid Mears Group shares, arguing that while the social housing maintenance group was in fine fettle, punters were likely to get more bang for their buck elsewhere. The feeling was that investors' penchant for safer stocks was waning and perhaps it was time to get into something racier.

At the time, the company's share price was 265p, and despite analysts at Panmure Gordon arguing that the stock traded at a discount to its peers, their target price was an uninspiring 260p. Yesterday's news that Mears has had a 58 per cent acceptance on its offer for Supporta, a care home provider, is good for the group and will give them a firm footing in what is a lucrative market. But potential investors should consider it a good longer-term move.

Analysts are still supportive and argue that, trading on a 2010 price to earnings ratio of 10 times, the stock is cheap (the dividend is a lukewarm 2.2 per cent). But we believe Mears is either a buy for safety, or one to avoid because there are better returns available elsewhere. While we like the company, and think it is a good long-term bet, the shares have underperformed the market since we last looked, so we still say avoid.