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Stale sandwiches at Greencore?

By Chris Bailey | Tuesday 13 March 2018

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Hands up, judging by the share price reaction in Greencore (GNC) shares today after its trading update my optimism (last discussed here) about the prospects for the UK's leading sandwich provider and particularly its US-led expansion was overdone. But as one of my early career investment mentors once noted 'what happens, happens. What matters is how you react'. So what to think about today's newly 'improved' share price?

Well let's have a look at the reasons for the reduction in the EPS range from 15.7-16.6p to 14.7-15.7p (a mid-point fall of about 6-7%). In the US the essential problems were an under utilisation of plant capacity (with a particular problem in a Rhode Island plant which it seems to me will likely close as utilisation was just 25%), the timing contribution of new business and additionally there was a quick negative nudge from the higher Pound versus the US dollar. Ugh. What that sounds like is the assets bought were not quite as hot as they found and that winning new business is not quite as easy as they hoped.

On the latter they are still winning business but the high single digit/low double digit profit growth is now going to be more of a 2019 event. On the conference call they talked about the on-boarding process taking a bit longer than thought. All things which many business acquisitions over time have found and, over time, dealt with - but not the best start to really bedding down this deal. I am happy to see the CEO rolling his sleeves up and personally getting more involved in the US as part of the management shuffle over there.

Thankfully - aside from a bit of weather impact from suppliers - the UK business continues to roll on (2018 expectations are still for higher margins and they believe the 'food-to-go' segment is still growing) and very importantly the ongoing net debt reduction continues apace and the target of x2 net debt:ebitda target remains unchanged. This is important as we know that over time the real killer to share prices is debt. The capturing of some of the synergies hoped for in the US and a bit less capex there are going to help.

The conference call commented that 'the shape or direction of our business remains unchanged' and the company is fortunate to have such a big and successful UK business to fall back on. The sub x10 P/E ratio using the updated guidance as well as a 4%+ dividend yield (which was reiterated) suggests value if you remain a believer...and the opportunity to apply that hard won UK know-how into the US is still there. I may be sandwich mad but I do still believe. Apologies if you have bought already but I do think you should augment (or make an original purchase) here.

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