Shares in Greggs (LSE: GRG) continue to endure a very challenging 2016, with the high street baker recording a fall in its share price of 20% since the turn of the year. That’s despite Greggs’ current strategy being highly successful in turning the business around, with a focus on closing unprofitable stores and on new and better value products having a positive impact on its financial performance.
A possible reason for Greggs’ lacklustre share price performance in recent months could be its valuation. Greggs may be a high quality business with a bright long-term future, but its price-to-earnings (P/E) ratio of 17.8 appears to be rather high. With Greggs expected to record a fall in its bottom line in the current year of 5%, its share price could move lower before it gains ground.
Of course, Greggs seems to have a relatively defensive business model due to its focus on value. But with a number of other food-focused businesses having lower valuations, there may be better investment potential available elsewhere.
Priced to go?
Also trading on a relatively high P/E ratio is fellow food company Just Eat (LSE: JE). The online takeaway delivery service has a rating of 38.3 and for many investors this may be enough to put them off investing in the company.
However, unlike Greggs, Just Eat has superb growth prospects over the next couple of years. For example, it’s expected to record a rise in its bottom line of 51% in the current year and a further 47% next year. This puts Just Eat on a price-to-earnings-growth (PEG) ratio of only 0.8, which indicates that its shares could move much higher over the medium-to-long term.
As well as having strong growth potential, Just Eat is also a relatively well-diversified business. It operates in a number of different territories across the globe and this provides it with a lower risk profile than a country-specific stock. And with the popularity of online ordering in the takeaway space being on the up, now could be a perfect time to buy Just Eat.
Long-term strengths
Meanwhile, Unilever (LSE: ULVR) also trades on a high P/E ratio, with the company having a rating of 20.7. While this may be relatively high when compared to the wider index, for a global consumer goods company it’s not particularly unappealing. In fact, Unilever’s rating has been higher in the past and could increase in future if it’s able to deliver on its upbeat growth forecasts.
For example, Unilever is due to deliver a rise in its bottom line of 10% this year and a further 8% next year. With it having a very well-diversified portfolio of goods as well as being geographically diversified, it seems to offer a very appealing risk/reward ratio. Certainly, value investors may wish for a lower P/E ratio, but Unilever seems to be well worth a rating of over 20, thereby making it a strong buy for long-term investors.
