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magazineFill up on Greencore while the market is feasting elsewhere
Share price weakness at sandwiches, salads and chilled soups supplier Greencore (GNC) presents a tasty buying opportunity for growth and income seekers.
The convenience foods maker’s margins and cash flows have come under pressure in recent years due to high levels of investment, yet Greencore is a business with strong fundamentals entering a period of nourishing returns.
Go-go growth
Greencore is a leading provider of food-to-go and grocery products, supplying own-label products to all the major UK supermarkets.
Following December 2016’s £594.3m acquisition of Peacock Foods, Dublin-headquartered Greencore is now also a leading manufacturer of consumer packaged goods for major food brands in the US, among them Kraft Heinz, and produces products for US convenience retail and food service leaders.
Sentiment towards Greencore is poor following the loss of its Starbucks frozen products contract. A precautionary product recall in the US has also weighed on sentiment.
Margins have been impacted by input cost and wage inflation in the UK, while free cash flow has been hampered by major capital expenditure projects to support growth.
Recovery time
Why are we bullish on the stock? Well, Greencore’s competitive strengths and growth potential are currently underappreciated by the market.
Food-to-go is one of the fastest growing parts of the UK food industry, underpinned by changes in consumer behaviour.
Major projects to support new wins with key customers are entering the final stages of delivery, meaning Greencore’s spending will fall, free cash flow should rise and debt levels can be reduced.
Frozen breakfast sandwiches-to-chilled meals maker Peacock has transformed Greencore’s business across the pond.
Providing a growth platform of real scale, Peacock has strengthened the US management team and gears Greencore into a trend towards outsourced manufacturing among US consumer packaged goods giants.
Numis Securities has a ‘buy’ rating and 300p price target for Greencore, expecting an increased focus on margin growth, cash generation and improving returns going forward.
For the year to September 2017 – the results are due next month (28 Nov) – Numis forecasts improved pre-tax profit of £117.3m (2016: £85.9m) ahead of £147.4m and £163.3m in fiscal 2018 and 2019 respectively.
Based on forecast September 2018 earnings per share of 17.5p (2017: 15.9p) and a 6.18p dividend (2017: 5.5p), Greencore’s growth prospects are materially undervalued on a PE of 10.5 times with a nourishing yield of 3.3%.
GREENCORE (GNC) BUY 184.6p
Stop loss: 147.7p
Market value: £1.28bn
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