Shares in focus: Greggs bucking the downturn

The business

Greggs is a national chain of 1,550 bakery shops, selling sandwiches, savouries (sausage rolls and pasties), cakes and drinks to six million customers every week. Ten regional bakeries and a fleet of 375 delivery vehicles support the shops.

This allows Greggs to make around 90% of what it sells, giving it better control of costs and product quality. Its aim is to sell tasty, freshly baked food at great value prices.

The history

Greggs has come a long way since its founder, John Gregg, used his bicycle to deliver yeast, eggs and confectionery in the late 1930s. In 1951, he opened a small shop in Gosforth outside Newcastle with a bakery on the back. The business didn't grow much until John's death in 1964, when his son Ian took over. During the 1960s and 1970s, Ian expanded Greggs away from its north-east roots by buying established regional bakers.

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By the time he handed over to Michael Darrington in 1984, Greggs had four bakeries, 260 shops and sales of £37m. It floated on the stock exchange in the same year. Darrington used the proceeds to expand into new geographic areas. Then, in 1994, Greggs bought rival chain Bakers Oven, which doubled its size and gave it exposure to south-east England.

While Greggs has had to cope with a weak British economy and rising costs in recent years, its shares have been a good buy. A share bought at flotation in 1984 at £1.35 would now be worth more than £52 (£5.20 after share split). Dividends of 18.25p per share in 2010 (£1.82 unadjusted) would give an income return on cost of 135%.

The chief executive

Ken McMeikan became CEO in 2008 after a successful career in food retailing, having been head of Tesco's Japanese business and also retail director at Sainsbury's. At Greggs, he keeps in touch with customers by visiting several shops a week. He has even been known to spend some days working behind the counter. He was paid £700,000 in 2010.

Why you should buy the shares

There's a lot to like about Greggs. Its shares are a classic defensive play and offer some growth on top. The fact that it offers customers excellent value for money remains its key attraction.

However, it is also very good at moving with the times. With British high streets depressed, Greggs is moving more of its stores closer to where people work and travel airports, train stations and industrial parks which looks sensible. It is also tapping into new revenue streams, such as breakfasts and coffee. Greggs sells good coffee for 25%-30% less than more established rivals. Unsurprisingly, it is seeing positive growth here.

The company wants to have 2,000 stores in Britain, which would give it a platform for further growth. And with the current weak state of the commercial property market, it may be able to acquire new sites at reasonable prices.

Last but not least, Greggs has impeccable finances. It has no debt and finances all its business investment and dividend payments from its own cash flow something Tesco and Sainsbury's, for example, have struggled to do. With energy and ingredient cost pressures easing, the shares on 12.4 times forward earnings, and paying a 4% dividend yield look well worth having.

The numbers

Key facts

Stockmarket code: GRG

Share price: 520p

Market cap: £527m

Net assets (July 2011): £183.9m

Net cash (July 2011): £8.8m

P/e (current year estimate): 12.4

Yield (prospective): 4.0%

What the analysts say

Buy: 5

Hold: 5

Sell: 1

Average price target: 486p

Director Shareholding

K McMeikan: 72,475

R Hutton: 55,003

R Reynolds: 52,440

D Netherton: 11,946