Are Greggs shares too cheap to ignore?

FTSE 250 (INDEXFTSE:MCX) stock Greggs plc (LON: GRG) has been hit hard by the coronavirus pandemic. Paul Summers is getting ready to buy again.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For a few years, baker Greggs (LSE: GRG) has been the toast of the high street. Savvy marketing combined with low-ticket treats had people queueing outside the FTSE 250 member’s stores. There were even ‘midnight openings’ for new products

From an investment perspective, Greggs has been even sweeter. Go back to 2013 and the stock changed hands for around 400p. Fast forward to this January and the very same shares were trading at 2,550p a pop. Who needs a high-flying electric car company when you can make a very healthy profit from the humble sausage roll? 

Greggs vs Covid-19

Since then, of course, the world has been turned upside down. The arrival of the coronavirus on UK shores resulted in people being unable to get their Greggs fix. It may have been bucking the trend of listed companies on the high street, but that mattered little when said high street was shut for business. 

Thankfully, we now appear to be through the worst. Greggs, however, is staying cautious, almost totally suspending its new shop opening programme and accelerating its delivery and click & collect services. It’s also been negotiating rent reductions with landlords.

However, it would seem that investors aren’t inclined to wait around for normal business to resume. At Friday’s close, Greggs shares fetched 1,481p — 42% off their all-time high.

The question is whether this price is fair or even a downright steal. For now, I’m inclined to go with the former.

Baked in?

I don’t think there can be any doubt that Greggs possesses many of the hallmarks of a great business. It generates consistently excellent returns on capital (low-to-mid 20%), has a strong brand, a loyal following and solid finances. Margins are also higher than you might expect — around 10%. 

All that said, there are reasons to think the shares could still have further to fall. For one, it’s looking like the UK economy will take longer to revive than first thought.

While recent figures show retail sales are improving, it would seem that many of us are struggling to break the new habit of buying more online and less from physical shops. In addition to this, a lot of office workers are still to return to their desks and the number of people filtering through train stations and airports is clearly still less than it was. All of these things impact on early morning and lunchtime sales at Greggs.

Tomorrow’s interim results will provide an inkling on how the company is faring post-lockdown, but I’m not expecting anything remotely pretty in the numbers just yet. After all, Greggs already stated in June that it expects sales will be “lower than normal for some time” and that it will be limiting its product range to best-sellers as a result.

Contrarian bet

Nothing can be guaranteed when it comes to stocks and being an existing holder of Greggs no doubt makes me biased. However, I struggle to imagine why it won’t bounce back even stronger once the coronavirus dust settles. For this reason, I’m likely to increase my (still modest) holding if the share price continues heading downwards in the near term. 

Successful investing involves distinguishing between companies experiencing short-term blips and those suffering game-changing problems. Greggs, I believe, is surely in the first category.

I’m getting ready to tuck in.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns shares of Greggs. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »