Food retailer Greggs (LSE: GRG) posted good news yesterday as it swung back into profit for the half year ending 3 July. I think this is one of the fastest turnarounds I have covered in recent months among stocks most affected by the coronavirus crisis.
Back in the black
Its return to the black has been driven by an over 81% increase in revenue compared to last year. It can be argued, of course, that last year does not offer a meaningful comparison, because of the lockdowns. But Greggs’ latest performance is also back to the levels last seen in 2019. Moreover, for July alone, its revenues slightly exceeded those in 2019.
The FTSE 250 company is also expanding its footprint across the UK. It has already opened 48 new shops in the first half of the year, and wants to increase that number to 100 by the end of 2021. It is also finding new ways of reaching customers, including through delivery services and expanding its menu to vegan options.
Greggs share price has run up too much
Clearly, the company is thriving and there is a case for me to buy the stock. However, the Greggs share price has already run up quite a bit. It is trading at levels much higher than it was before the pandemic. I reckon this was in anticipation of better results. And indeed, its performance is good. But I am not sure if the numbers as yet are strong enough to justify the extent of the share price increase.
Even if I look at it from a relative price perspective, it still looks pricey. The price-to-earnings (P/E) ratio, which allows a comparison across stocks, is around 32 times according to my estimates based on the latest numbers. I could justify these numbers if the stock markets were rallying. Because then they could be explained by broad market euphoria.
That is not the case at present, however. The FTSE 100 index, for instance, has been relatively flat for the past two months. It is also still below its pre-pandemic levels. The story is similar for the FTSE 250 index, of which Greggs is a constituent.
This means that other FTSE 100 and FTSE 250 stocks may just be far more attractive from a relative price perspective. As an investor, I would much rather allocate my funds to companies that have the potential to rise fast than those that already look highly priced.
My takeaway
Based on this reasoning, I think that the pace of the Greggs share increase may slow down. Consider the example from yesterday, when it released its results. The Greggs share price actually fell, and in trading today, it has dipped slightly as I write.
If it keeps up with its performance, as was evident before the pandemic, I think Greggs can still be a great stock to buy for the long term. But I am waiting for a bigger dip before buying it.
