Get your teeth into Greggs' expansion plans

Through the provision of good value, comforting food, Greggs has been one of the winners of the recession. It also now looks like the company could be one of the winners of the recovery.

Greggs

448p -17.3p

Questor says BUY

Questor has said many times over the past six months that companies that continue to invest throughout the downturn will be the winners on the other side. This remains the case – and Greggs falls into this category.

On Tuesday, the sausage roll and pasty group unveiled a very ambitious – but achievable – expansion plan, but the market did not react well to the news. Questor believes that Tuesday's fall was overdone and has provided a buying opportunity.

Greggs also confirmed that third-quarter like-for-like sales rose by 1pc and cost pressures were easing. This is pleasing news, but the really important part was the acceleration of its expansion plans.

The biggest bakery chain in the country said that it would double its rate of opening new stores and renovating its existing shops. The group is not only expanding the number of stores, but it will move into new types of locations, such as shopping centres, railway stations and airports.

The company now plans to open 50-60 new shops this year and "at least" 70 from 2011. In total, it plans to add 600 premises over the next five years, bringing the total to more than 2,000.

"Greggs is a convenience business. You need to have a Greggs conveniently located," Ken McMeikan, Greggs' chief executive, said on Tuesday. Mr McMeikan is a former executive at Sainsbury's.

The company does not plan to raise cash to fund the programme. It should be able to do it from existing cash flows. The group also had just under £15m of cash in the bank at the interim stage.

In the first 16 weeks of the second half total sales increased by 2.5pc and like-for-like sales by 0.2pc. The dividend has been raised every year since 1984 and this looks to be the case this year.

The shares are up 10pc since their recommendation on August 12 and they are trading on a December 2009 earnings multiple of 13.8 times and yielding 3.5pc. Questor believes this represents good value. Buy

Bunzl

652½p +½p

Questor says BUY

Consumable distribution group Bunzl confirmed this week that everything is on track to meet full-year figures. This is reassuring and underscores the relatively defensive aspect of the majority of its business. That said, the group is also highly exposed to an upturn in business activity – so 2010 is looking promising.

The trough in the group's cyclical businesses appears to have passed or be imminent. The third quarter saw group revenue rise 8pc, but this was flattered by currency moves. When these effects are stripped out, sales were down 1pc.

Overall margins improved compared to the first half as the group's cost-reduction plans kicked in.

The company is still on the lookout for acquisitions, but price issues remain. Bunzl is likely to move back on to the acquisitions trail next year, continuing with its strategy of consolidating fragmented markets.

Bunzl does not provide its clients with their main stock in trade but all the consumables they use in day-to-day business, be that coffee cups, carrier bags, labels, toilet rolls and cleaning items. The benefit to the consumer is that Bunzl can source its goods internationally, saving costs, and provide a one-stop shop for its clients to order such goods.

Between 1991 and 2008 Bunzl had a compounded annual growth rate in operating profits of 15pc, with the figure for revenues over the same period being 14pc. This is an enviable track record.

The shares are trading on a December 20099 earnings multiple of 12.5 times, falling to 11.8 next year. The yield is 3.3pc.

Questor recommended buying shares in Bunzl on December 21 at 571p and the shares are now 15pc ahead. Buy.

Mothercare

598p -4½p

Questor says BUY

Last week's in-line trading update from Mothercare demonstrated the international growth potential this company has.

British companies need to get involved in markets abroad in order to grab growth over the next few years – and Mothercare's plans bode well for the future.

International sales at the baby products groups increased by 23.2pc, taking total growth in the first half of the year to an impressive 27.3pc. The company opened 61 stores in the first half and most areas showed growth, except for well-flagged economies in turmoil such as Ireland and Dubai. A fourth store was opened in China and the group launched the Mothercare chain in Australia and the Early Learning Centre in South Africa for the first time.

UK sales rose 2pc, which meant that total group sales rose by 7pc.

The group also recently signed a new joint venture with DLF Brands to boost its Indian expansion plans. The group now targets 200 Mothercare stores in the emerging Asian powerhouse.

The shares, which were first recommended at 439¾p on May 27, are up 37pc since the initial tip.

The current-year earnings multiple is 18 times, falling to 16 times next year, which is high, but this reflects the group's strong international growth profile. Buy.