Defensive Portfolio Review - recent roundup of Greggs, Morrisons & the Restaurant Group

Mr. Market has been kind to my defensive portfolio lately, putting it into one of the top 3 performers for the month. This is remarkable for the fact that the companies I have selected are quite stodgy. It seems highly unlikely that I will be able to repeat this performance in the future; so I must guard against the temptation to puff myself up like a proud preening popinjay. Neil Woodford's recently-expressed opinion that careful selection of defensive stocks could be a "career-making opportunity" is beginning to look remarkably prophetic. All hail to the Woodford! Anyway, enough of my self-contratulating silliness. Some companies that I have taken an interest in for my defensive portfolio have recently released statements, so I thought that now would be time to give a quick rundown of the results, together with my opinions.

Greggs (LON:GRG) - 524p/£529m

Greggs is a bakers, owning a chain of 1500 shops through which to sell its bread, sausage rolls, cakes, etc. In an IMS today, Greggs reported:

• Total sales growth in first 18 weeks up 4.8%
• Like-for-like up 0.8%
• Strong Easter performancenew shop expansion of track
• Financials remain strong

The numbers: PER 13.8, yield 3.5%, returns on equities over the last decade about 20%, z-score 6.6, EV/EBITDA 6.6

My view: good quality company, happy to have it in the portfolio.

Morrisons (LON:MRW) - £7.9b/301p

Morrisons is a supermarket. No points for getting that one right. The price dipped 1.8% today. On 8 May, it reported:

• Attracted record numbers of customers into its stores over the Easter holiday
• Encouraging start to the new financial year with sales growth continuing ahead of market
• Expects challenging economic conditions for customers
• Prices of oil and increasing commodity prices had compounded pressure on consumers' disposable incomes
• Total sales, exc. VAT and fuel were up 4.2% (7.3% including fuel).Like-for-like grew by 2.5% (5.8% including fuel)
• Plans to buy back £1b over the next two years  

In his blog, Terry Smith commented on the issue of share buybacks:

Capital allocation decisions are amongst the most important decisions which management of companies make on behalf of shareholders. Yet share buybacks are not sufficiently understood by company investors and commentators, and maybe even by company management. One of the most important facts that is continually overlooked is that share buybacks only create value if the shares repurchased are trading below intrinsic value and there is no better use for the cash which would generate a higher return.

Commenters on his blog made reference to MRW:

The Wm Morrison buyback is a classic example of when NOT to buyback shares - and certainly not on borrowed money by a Company supposedly expanding and needing all the Funds and borrowing facilities it can lay it's hands on - what happens tomorrow when an unexpected opportunity arises?

MRW has a PER of 12.8,  yield of 3.3%, z-score of 3.7, PTBV of 1.5, EV/EBITDA if 7.3. Analysts forecast mid-double-digit growth in 2011 and 2012.

My view: MRW is on an attractive valuation, with good growth prospects. Returns on equity are in low single digits, but that's to be expected with supermarkets. I am sanguine about "challenging economic conditions" and the whole buyback program. I am very happy having this company in the portfolio.

Restaurant Group (LON:RTN) - £605m/303p

RTN operates 367 restaurants. Its main brands are Frankie & Benny's, Chiquito and Garfunkel's. It runs pub restaurants and concessions within airports. In a recent AGM statement, the company reported:

• Trading for the first 18 weeks has been satisfactory with total sales 5.5% ahead of the previous year and like for like sales 0.5% ahead.
• Margins are broadly in line with management's expectations.
• The Leisure division has traded well
• We have opened two new Frankie & Benny's restaurants and one new Chiquito. These are trading ahead of our expectations.
• Our Concessions division has continued to trade well In total we expect to open between 22 and 27 new restaurants this year
• The Group's balance sheet remains strong
• Outlook: Trading conditions during 2011 look set to continue to be similarly challenging to those we experienced during 2010, with consumer sentiment remaining cautious and household inflation and disposable income still under pressure

RTN has a PER of 14.7, a yield of 3.0%, and a z-score of 4.4. EV/EBITDA is 7.6.

Return on Capital has been impressive during the last decade. The share price is down nearly 8% today, prompting me to take a nibble for the portfolio. At a PER of 14.7, it doesn't offer amazing value, but with a great balance sheet, low double-digit growth expected, I am tempted to take a small bite. Good quality company.