an analyst is only one overpaid individual with only one opinion = not always right, but can be very wrong - watch their long term track record closely, check their knowledge of the industry/sector covered, before following them over the cliff !!
On a 1 year view, the chart shows that GNK has broken through its 50 day ma and so far stayed above it with the 50 ma itself having at last turned positive. That would indicate a Buy signal in about 75% of cases. However the previous time that happened was last March, and in that case it was a weak signal and it broke down within 2 months.
The signal looks more convincing this time, with the 50 day ma having fallen so far behind its 200 day ma. Provided the sp doesn't fall back sharply below its 50 day ma from here (a dead cat bounce), it seems that a sustained rally is the likely occurrence.
Shares in Greene King were also higher, despite a downgrade out of JP Morgan to 'underweight' and downwards price target revision from 650p to 500p.
In a research note covering the year ahead, JP Morgan described the company as an "underperforming pub estate with severe cost headwinds."
Yes interesting move in GNK. Comparing with MARS which had a big jump up after better than expected results relative to poor GNK numbers. (Chart below may or may not show comparison, I never know with ii BB!). Maybe there is some truth in the rumours of a bid or whatever, but I don't invest purely in the hope of a bid, if it comes along and price is right fine but the business needs to justify price on fundamentals.
JPM does not show up in short-tracker for GNK, which shows 6.7% shorts. Marshall Wace LLP, Blackrock and others have been building short positions throughout 2017 and been proved very right. If there is a big jump in shorts in response to the SP rise I would take that as a worrying sign.
That said, even with poor GNK performance, using forecasts for 2018/19 and assuming zero or slight negative growth (-1%) after that, I get a valuation of over 600p on a DCF basis, but the same analysis for MARS (~150 Vs 113p) suggests it is much more undervalued, that is where I have been adding lately, GNK I will aim to reduce.
Long discussion or ramble from Questor.
Swapping this for a "growth stock" isn't necessarily that easy -- many of the "growth" stocks have valuation's way above their expected next 10 years of growth priced in.
One has to wonder if the government wil ever wake up and address business rates in a fair manner. If this does receive a fair solution, which one hopes has to be the case or we won't have a physical retail sector, then GNK could be the "growth stock" that was sold down at a 20% loss when everyone else has collected a 6% dividend whilst watching the growth stocks in some sectors get hammered in a downturn.
Be interesting to see the list of growth stocks they are considering and their respective valuations.
Questor is in a quandary. Our difficulties relate to Greene King, the pub company we tipped as a buy in February. Does it still deserve that rating?
If we stuck strictly to our follow the money remit, the answer would be no. There is another side to this story, however, which we will come to in a moment.
First, the fund manager whose decision to buy the stock formed the basis of our tip explains why he has had to change his mind.
Chris Hutchinson bought the shares for his Unicorn Outstanding British Companies portfolio shortly before our original tip because of a sense that sentiment towards the stock had reached a point of maximum pessimism and that the shares were therefore too cheap
When I bought Greene King I thought it was through the worst, Hutchinson told Questor this week. Unfortunately it now finds itself in a perfect storm. He said inflation and intense competition in the pubs sector were the biggest problems.
Inflation not only increases Greene Kings own costs but also leads its customers to tighten their belts, he said, referring to the failure of wage increases to keep pace with the cost of living.
This in turn causes pubs to compete all the harder for business. The result is price cuts and lower profit margins.
At present, Greene King has no pricing power, Hutchinson said.
In all, the company expects £60m in extra costs in the current year. Hutchinson said it was responding with self-help measures that might save £45m. But even if it can achieve that, youre still left with £15m in additional costs. I have to admit that I underestimated the impact of inflation on the group.
He said one of the essential qualifications for holdings in his fund was consistent earnings growth. Over the long term Greene King has demonstrated this but there have now been six consecutive downgrades to forecasts, he said.
Profits are well down on where I expected them to be when I invested and I dont see any prospect of that changing in the short term. I cant see a catalyst to get the share price moving or for the stock to meet my funds criteria once more. If that were all there was to say about Greene King, Questors recommendation now would be an unequivocal sell.
But Hutchinson went on to describe how his own opinion differed from that of some of his colleagues, who not only were happy to hold on to the stock but had actually topped up their stake slightly following last weeks interim results.
Our income fund has a different remit from mine, he said.
Some in the market had feared a dividend cut when the results were announced but it didnt happen and the shares now yield about 6.1pc, with the dividend covered about 1.7 times by earnings. It remains a solid business with a solid dividend and will meet some income investors criteria even if it no longer meets mine.
Following recent falls in the share price, he said the stock was now one of the cheapest in the FTSE 250.
It has a price-to-earnings ratio of about 7.6, which is cheap by any measure, certainly by comparison with the wider market, and a free cashflow yield [the yield calculated with reference to cash generated as opposed to the dividend paid] of about 10pc, which should support the dividend.
Hutchinson added: Greene King now represents a cyclical value play. Its unlikely to get hugely cheaper; I think the share price will go sideways for a while.
Its one for patient value investors who are prepared to wait for two to three years.
Sometimes the appropriate rating for a stock depends on the needs, goals, temperament and time horizon of the investor. The Follow the Money column often focuses on growth stocks, where we hope for share price appreciation in the coming months, while our Income Portfolio on Fridays caters for the yield-hungry.
In the case of Greene King, then, our advice for growth investors is to sell, even though this means stomaching a 20.4pc loss, while income seekers can safely hold.
Questor says: gr
As am old fogey I listened to Tim Martin on Desert Island Discs on Sunday - founder of Wetherspoons and quite an interesting guy who visits all his pubs as if he is a punter assessing what every one needs according to the area etc. The beers are quite cheap and he seems to attract the younger drinkers. Perhaps Greene King needs to be a bit more on the ball, develop their menus etc but the times are difficult, especially with the raising of taxes. I still like the company though despite it being one of my worst performing shares.
The pub industry has me fascinated. I live in North London, where a number of pubs have shut down.
Pubs, where 10 years ago youd never have thought theyd close.
The pubs that have closed tend to fall into 2 or 3 catergories, with a bit of a cross over:
1. In an area where the community has changed and where the newer populace isnt one that tends to visit pubs;
2. A poor food offering, or no food offering;
3. Or a Pub landlord that has run the pub for a number of years, retiring and sold up to developers.
In addition to that, I think generally the youth today are more conscious about the effects of the booze and coupled with the smoking ban, not to mention healthier lifestyles, pubs arent the attraction they once were.
In my view the independent land lord will continue to struggle and compete, unless they have a very good menu. There is one near me, where he has no menu, its a small pub, but does well purely because of him. The minute he steps aside another pub bites the dust. Personally I love pubs that do not offer food, but I realise the margins on just the booze can be too fine to sustain the business nowadays.
And all well be left with is chain pubs, chain pubs like Fullers and Greene King. Which in London do incredibly well. Rarely are they empty. They have a better buying power (obviously) but generally better located properties.
Then there is the new style pubs/ bars and the wave of Brewdog pubs, with prices of £5-£6 for just 2/3 of a pint! TWO THIRDS of a pint! Quite nice actually. Theyre packed and selling by the bucket load. GK and Fullers need to offer a good range of beer, which in fairness they do.
One thing that does concern me is Fullers and GKs menu. Its the same old rubbish pie and mash, fish and chips, microwave curry etc. Which is fine, as Im not expecting a healthy option or anything ground breaking, but they look tired. Nothing inspiring. They dont cater for people under 30 who dont really like food like that, and the people these pubs need to attract.
There is a GK pub near me, which they took over a few years back. It was struggling before hand, but GK did a great job and it was packed for the first 2-3 summers. But lately the food isnt what it was, the service has gone downhill and pretty much reflects the share price. I have brought this to GKs attention a few times but an improvement isnt obvious. Hopefully this trend isnt replicated across their pubs.
I think just looking at the decline in pub numbers may give a deceptive picture.We continue to see a change in the pub business.Closure of small mainly beer led local boozers with a limited and in many cases declining potential but a major expansion in investment in better located pubs,"destination pubs" is I think the catchword,and also building new pubs(Wetherspoons being active in this area), to include a major food offer,coffee etc & often other facilities including bedrooms.
These type of outlets will turnover a multiple of each closed outlet.
"""""Simon Crompton, owner of the Baum, said: In five years time when we have no rate relief at all I doubt whether we will be able to stay open. We will have to pay £3,500 more in rates every month as our rateable value has jumped from £26,000 to £126,000. Cromptons pub has weathered many storms not least people visiting less regularly and drinking supermarket-bought beer at home but he condemns the change as the worst thing to have happened in his 24 years running the pub.""""
It's doubtful if there will be even half the rrent number of pubs left in 10 years if these rate rises are common across many of the regions.
This is a bad business and I'm kicking myself for investing in it thus far.
This doesn't stack up with the suggested 29 a week in 2017, although the rate of closures could have eased off in 2015 and has since picked up pace again.
I own Fullers and Greene King, neither in the short term look like very clever moves on my part, but I'm trying to get a handle on the future here to decide if cutting losses is the right thing to do or stay for a lock in after hours?
Games -- Went to a Chef & Brewer pub the other day -- pretty good food and nice environment, but the pub fit out must have cost a lot of money.
Which shows from 1982 there were 67,800 pubs and by 2015 that number had dropped to 50,800. Not sure how accurate these figures are but that represents a decline over 33 years of 25% or just over 3/4's of one percent a year.
Need to look at some more numbers and other information, but I believe they are still closing at a rate of 29 a week or 1508 a year or 0.3% a year from the 2015 figure.
There must come a point where the critical mass of available venues reaches a point that should see an improvement in business, considering that the population is still growing at a tremendous pace.
Anyone here looked into this more?
Games -- Unless we all believe that everyone will stay at home and drink 6 packs from Tesco?
Digital Look included the following comments in their report on GNK's results
The Numis comment on investment in quality and service sadly sums up the short term views of the City, there have been plenty of comments on this board about quality and service in some GK outlets, if they are not resolved the long term impact on earnings could be much more. The mid-long term benefits of getting this right in pubs/restaurants is very significant but lost on those who cannot see past next quarter. 10m is a decent chunk, GNK need to make sure it is used wisely, I am inclined to give the BOD the chance to deliver.
On a more hopeful note, "After Mitchells & Butler plunged 10% last week to revisit summer lows, only to recover all its lost ground and more, van Dulken wondered if Greene King might be set for a similar recovery from its current hangover. "
Well yesterday's recovery from 500p was encouraging.
Holding my losses here, thank goodness I had some Marston's to take the edge off.
Broker Numis said LFL sales were weaker than expected and the PBT of £127.9m compared to its forecast £130m, while the decision to invest £10m in value, service and quality "imply mid single digit downgrades to consensus estimates we believe".
Analyst Tim Barrett said the market is likely to focus on securitisation covenants following rival Mitchell & Butler's recently announced decision not to pay an interim dividend. The effect of refinancing the Spirit debt is to reduce GNK's interest payable by circa £10m pa from 2019, he noted.
Mike van Dulken at Accendo Markets noted that the shares were retesting of last weeks five-year lows.
"Decent growth in Brewing and Brands was no match for cost pressures on the key Pub division and investors clearly see risk in challenging first half trading conditions continuing, the consumer still cautious and cost pressures hanging round. And management confidence is clearly lacking with no increase in the first half dividend something it hasnt failed to offer since 2010/11."
After Mitchells & Butler plunged 10% last week to revisit summer lows, only to recover all its lost ground and more, van Dulken wondered if Greene King might be set for a similar recovery from its current hangover.
Concerning results. Net debt up from £2074m to £2119m. 'Strong cash flow' they claim in the headlines. Yet int net operating cash flow is down from £126m to £97m, a 23% drop yoy, so total bs claim. Taking core capital expenditure of £60m that leaves FCF at £37m. They certainly can't afford to maintain a full div, yet have stubbornly decided to continue to pay one at the same rate. With the level of debt continuing to rise slowly and falling consumer expenditure, something has to give eventually.
Well it dropped 7% and now down 5% so perhaps it's going to level out.
The situation isn't going to change for a long time until Greene King reduces exposure to some of the less profitable pubs and the government wakes up (if it ever does) to the punitive nature of business rates where pub groups pay a disproportionate share of the over all tax compared to the revenue and profits.
Games -- I'm afraid I was far too early buying this at 7XX -- Oh well sit tight, it's going to be a few years to hold this one I think -- the divi is safe for now, but the debt isn't pretty --- big mistake buying Spirit me thinks!
Greene King will be crying into its beer this week when it reveals a drop in profits, as pubs face rising costs on several fronts.
On Thursday it is expected to reveal adjusted pre-tax profits fell more than 8pc in the first half to £127m, on revenues of just over £1bn.
Broker Investec said demand for food at some of Greene Kings pubs had taken a knock. It has downgraded its expectations for the full year too.
The Bury St Edmunds-based group warned in September that sales in the pubs it directly manages had fallen 1.2pc and cited unprecedented industry cost pressures. Inflation, business rates, the living wage and the apprenticeship levy are all making business tougher. Deutsche Bank said recent data from the sector showed a deteriorating sales trend, with supplier price rises proving difficult to pass on to hard-pressed drinkers.
The downbeat predictions come after a tough week for the pub industry which saw Mitchells & Butlers cut its interim dividend because of fears about consumer spending and Brexit uncertainty. Shares in the company fell as much as 13pc and even dragged Greene Kings down by 5pc for a short time.
Simon Emeny, Fullers chief executive, was equally dour in spite of his company producing a rise in sales and profits, claiming he could not remember a time when we have faced such an array of additional costs. Philip Hammond did offer a small boost to pubs in last weeks Budget by linking future rises in business rates to the consumer prices index, rather than the steeper retail prices index, from next year.
This should reduce costs but has not silenced calls from the sector for a major overhaul of rates.
Marstons also reports full-year results this week and adjusted profits are expected to be up 2.5pc at £82.4m.
"One of the big stockmarket stories of 2017 has been the spectacular performance of smaller, growth-oriented shares. The @GB:ASX:AIM All Share index has soared by more than 20% this year, casting a shadow over the usually solid mid - and large-cap ..."
Iphone X ? not many q's in Germany - personally I think 1000 Euro plus for a phone/text/internet box is a bit mental - not a flop though.. P/FCF and P/S above 5 yr averages by around 30% - still holding though cos of all that cash.
Upped BRKB too to 3%. - cheapest fund I've got :-)
Johnny -- still hanging on to mine at (quick check) 2.33% of my wad.
80% up so far and the yield on the original purchase is quite handsome.
Do you think the iPhone X is going to be a flop then?
The forward P/E is less at 14.37 but still it's income is still heavily dependent on iphone sales.
The service element has grown to nearly 16% of sales.
Q4 Apple Revenue jumped 12% on this time last year.
"I think there's an old adage of yield and PE both @ 7, then fill yer boots .. or summat.."
Unfortunately, these days a high yield and a low P/E can be a strong signal of something going wrong - a value trap. Look at Carillion and Provident Financial as examples.
Whilst I've no reason to think GNK are in difficulty the fact that the market doesn't seem to think they are good value is a danger signal for me.
The fact that shorting has risen from 2% in June to over 5% now is also a worry. I've found recently that this is a good indicator of a share price that's likely to be weak. Professional shorters have far more access to information than private PI's like I do, and I think it's dangerous to bet against them.
As someone who's been sitting on the sidelines considering buying some GNK I'm not convinced that this is as low as they'll go, so I'm going to watch and wait some more.
After submitting a complaint HSBC have now sent vouchers to me. They were not destroyed as originally suggested, but put in the hands of a 'Custodian' who has released them to me as a result of the complaint.
I have no idea whether this is a one-off situation but I will certainly find out if I am still a Greene King shareholder next year.
My wife & I ate at the Castle in Bakewell last week - the new menu was the most interesting one I have seen for a very long time. The quality was good too, and the staff were all most helpful and friendly. By the way its a dog friendly pub - dogs can join owners in the stone flagged floor area of the pub (about half of it) and get some dog treats into the bargain.
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