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Plenty of investors have fallen for Greggs‘ (LSE: GRG) shares lately, but Tesco (LSE: TSCO) has delivered the much smoother ride.
Tesco’s a FTSE 100 giant, while Greggs sits in the FTSE 250. Both have benefited from Britain’s love of affordable food, but their recent share price performance couldn’t be more different.
Tesco shares have been selling like hot cakes, up 82% over the last five years. They’ve slowed lately, edging up just 6% over the last year. Greggs has been far more erratic. Interest in the bakery chain rocketed as profits spiralled, but they plunged as growth slowed. The shares are down 40% over five years, although they’ve recovered 10% over the last 12 months.
One of these stocks is cooking
Tesco’s first-quarter results (18 June) showed like-for-like sales rising just 1% to £16.8bn, held back by a 3.2% drop in sales at underperforming wholesale operation Booker’s. It’s still on course for full-year underlying operating profits of £3bn-£3.3bn. Free cash flow is expected to land between £1.5bn and £2bn. It’s also working through a £750m share buyback programme. Which all looks pretty healthy.
Greggs’ first-half results (29 July) beat expectations. Sales climbed 7.2% to £1.1bn, while operating profit jumped 22.9% to £86.5m. That sounds better than Tesco, although Greggs was benefiting from a soft comparative period. Its operating margin was 7.9% against Tesco’s 4.3%, so it’s more profitable on each pound of sales.
Both face the same cost-of-living squeeze as cash-strapped shoppers watch every penny. Tesco has greater scale and a much broader offer, which possibly makes it the safer bet.
Value and dividend income
Greggs is the cheaper of the two, trading on a price-to-earnings ratio of 14.4, while yielding 3.94%. Tesco trades on a P/E of 15.8 and yields 3.03%. Greggs pays the higher income, but Tesco has delivered more growth.
Greggs still has scope. It opened 34 net new shops in the first half and now has 2,773. Management sees scope for at least 3,500 UK shops. Ironically, grocery sales through partners such as Tesco add another growth channel.
Tesco has fewer obvious growth avenues, but it has market leadership, scale and a solid position with value-conscious shoppers.
My verdict
In general, I favour Tesco. It’s done a fantastic job to hold onto its market share in the face of challengers such as Aldi and Lidl. I’d consider Greggs too.
However, I wouldn’t rush into either stock at today’s prices. Investors might consider buying them on a dip, particularly if the cost-of-living squeeze deepens and valuations become more attractive.
So what do the experts say? Consensus forecasts produce a one-year target price of 1,819p for Greggs which, if correct, would be a modest 3.75% above today’s 1,754p. Tesco’s target is 516p, around 11% above today’s 465p. Like me, brokers are a little bit more optimistic about Tesco. And like me, they’re not expecting wonders from either of them.
For me, Tesco offers the better balance of reliability, growth and income. Greggs is more interesting as a recovery play, but its five-year record shows how volatile it can be. But I’ve got my eye on other FTSE growth opportunities…
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Harvey Jones does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
