Greggs shares are piping hot

Greggs, the high street baker, might not be everyone's cup of tea, but there's nothing not to like in this unscheduled third-quarter trading update. In fact, it's selling so many sausage rolls, pasties and sandwiches that management thinks full-year profits will be "materially" ahead of expectations. That's forced big earnings upgrades, which means that despite rocketing 15% to an all-time high, the shares do not look expensive.

Like-for-like sales have surged by 5.4% in the past 11 weeks compared with a more modest 3.2% in the first half. That's driven year-to-date sales up by 3.9% and total sales growth to 3.5%.

Margins continue to improve, driven by falling ingredient prices and structural cost savings. The weather has been kind to Greggs, too, and its new range of sandwiches and coffee is selling well.

Broker N+1 Singer is impressed. It's raised full-year adjusted pre-tax profit forecasts by 10.5% to £54.5 million, giving adjusted earnings per share of 40.3p. Yes, last year's strong fourth-quarter sales will mean more modest growth at the end of this year, but N+1 still predicts like-for-like sales growth of 3.1% in the second half. Forecasts for next year rise by 8.5% to £55.8 million and 41.8p, respectively.

At 603p, Greggs trades on a forward price/earnings ratio (P/E) of 15, dropping to 14.4 for 2015. An enterprise value-to-cash profits ratio of around 6 is modest, too. N+1 thinks fair value is more like 7-7.5 times for 2015, implying a share price of over 650p.

A prospective dividend yield of 3.6% sweetens the investment case, restructuring benefits are kicking in, and net cash if tipped to start growing rapidly again next year. Factor in forecast year-end next cash of £28.9 million for 2015, and the forward P/E falls way below 14.

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