Greencore stock rallies 10% as analysts say 'upgrade momentum continues'

Investing.com -- Greencore (LON:GNC ) saw its stock rise by 10% after the company delivered another set of strong quarterly results, fueling further confidence among analysts. 

The company reported an acceleration in its like-for-like sales growth for the fourth quarter, marking an improvement across almost all product categories. 

LFL sales growth for the fourth quarter reached 3.4%, up from 1.4% in the third quarter, signaling robust demand across its portfolio of fresh sandwiches, salads, sushi, and ready meals.

The uplift in the fourth quarter performance was largely due to a combination of volume growth and successful cost control measures. 

With the completion of its contract exits and the Trilby disposal, Greencore’s total revenue increased by 3.7%, recovering from the 6.1% decline seen in the third quarter. 

Additionally, profit conversion exceeded expectations, prompting the company to upgrade its full-year operating profit forecast to £95-97 million, up from the previous guidance of £88-90 million.

Analysts at Jefferies hailed the latest results as another encouraging update, highlighting Greencore's ability to sustain upgrade momentum throughout the fiscal year. 

In a note, Jefferies analysts Andrew Wade and Grace Gilberg pointed out that this is the third upgrade in 2024, supported by the company's solid LFL volume growth and stronger-than-expected profit extraction. 

The company’s ability to navigate through cost pressures while delivering improved margins has impressed investors, with Jefferies noting a mid-point upgrade of about 5%.

While the operating profit upgrade was somewhat flattered by £2.5 million of costs now being treated as exceptional, the analysts emphasized that the underlying improvement in profitability remains significant. 

Greencore also reiterated its commitment to a FY24 dividend, further bolstering investor sentiment. Meanwhile, the company’s net debt is expected to be at the lower end of its target range of 1-1.5x EBITDA, adding to the financial stability narrative.

The positive response to Greencore’s latest update comes on the back of a strong year for the company, with its shares rising 150% over the past 12 months. 

Despite this, Jefferies believes there is further upside potential, particularly if the company can continue its streak of profit upgrades. The analysts indicated that the stock remains attractive, even after its recent re-rating, as long as the momentum in earnings upgrades persists.

Jefferies values Greencore at 6.5x FY25 estimated EV/EBITDA, which is slightly below its long-term average but reflects a premium compared to previous valuations. 

Upside risks include more aggressive cost savings, market share gains, and the potential for new contract wins. 

However, the analysts also warned of downside risks, such as increased competition and difficulties in maintaining margin recovery from retailers.

Greencore’s focus on the high-demand “Food to Go” category, along with its strong relationships with key UK grocery retailers like Marks & Spencer (OTC:MAKSY ), has positioned the company well for further growth.

With 14 manufacturing facilities and an expanding direct-to-store distribution network, the company is well-placed to capitalize on the growing trend toward convenience foods in the UK.

Source: Investing.com