Does 10% sales growth make Greencore Group plc a better buy than Tesco PLC?
Convenience food specialist Greencore(LSE: GNC) has released an upbeat set of full year results that show it is making good progress with its strategy. In fact, its top line has risen by 10.6% and this has helped to push Greencore's share price over 12% higher today. Looking ahead, the company has a bright long-term future, but is it a superior investment option to Tesco(LSE: TSCO)?
Well positioned for growth
Greencore's adjusted earnings increased by 8.3% versus the previous year. This was due to a strong performance from the company, as its decision to focus on the US and UK convenience food markets paid off. In the UK, Greencore delivered substantial like-for-like (LFL) growth despite facing a challenging retail environment as well as a difficult economic outlook. In the US, Greencore is now well positioned for growth over the long term and this has been boosted by the acquisition of Peacock Foods, which was also announced today.
The purchase of Peacock Foods for $747.5m could boost Greencore's market and channel position in the US, in order to improve its long term outlook. Peacock Foods has a strong position in frozen breakfast sandwiches, chilled kids' meals kits and salad kits, generating revenues of around $1bn and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of $72.1m.
Looking ahead, Greencore is forecast to grow its earnings by 10% in the new financial year. Despite such a positive growth outlook, it trades on a price-to-earnings growth (PEG) ratio of just 1.3. This indicates that Greencore offers excellent value for money - especially when its stable track record of earnings growth is factored in.
A major advantage
This reliable history of growth compares favourably to the volatile performance of Tesco in recent years, which has endured a difficult period as competition in the UK supermarket sector has intensified. However, under a new management team, Tesco has transformed its performance and is forecast to increase its bottom line by 170% this year and by a further 34% next year.
This could boost investor sentiment in the stock and lead to share price gains. In terms of upside, Tesco's PEG ratio of 0.6 indicates that it offers capital gain potential. Such a wide margin of safety also means that if Tesco's financial performance disappoints due to increasing competition within the UK supermarket space, its shares may not be hit all that hard. With Brexit negotiations yet to commence, having such a low valuation could prove to be a major advantage for Tesco.
Clearly, Greencore offers greater stability and a lower risk profile than Tesco. And with a low valuation and strong growth prospects, it is a sound long term buy. However, Tesco could record stunning share price growth if it delivers on its guidance. Its new strategy is yet to bear fruit and, should it do so, it could significantly outperform Greencore, as well as many other food producers and retailers.
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Peter Stephens owns shares of Tesco. The Motley Fool UK has recommended Greencore. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.