Around 52-week highs, is the Greggs share price primed to surge?

Jon Smith notes the strong jump in the Greggs share price over recent months, but explains why he feels there’s more room to grow.

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Yesterday, Greggs (LSE:GRG) shares managed to trade above 2,800p, just a few pence away from the 52-week highs. It has jumped a remarkable 50% in the past six months to reach this level (up 11% over a year).

Given such strong 2022 results, I’m wondering if we could be nearing a breakout move for the Greggs share price.

Reasons to be excited

Quarterly updates in H2 last year did indicate that the full-year results would be impressive. Therefore, the share price has been rising for some time on the basis of momentum and better-than-expected financials.

The full release came last month, highlighting a 23% growth in total sales versus last year. Part of this was driven by the record of 186 new store openings, supporting revenue growth. It’s targeting a further 150 net openings (accounting for closures as well) this year.

This all helped to filter down to a pre-tax profit of £148.3m, up 1.9% from 2021.

Aside from the optimism around further store openings this year, there are other reasons why the stock could keep moving higher. Revenue should increase due to a push for later store opening hours. Some 500 stores are open to 8pm, or later, with more being pushed in this direction.

The business also finished the year with a good cash position of £191.6m. This means it has the funds needed to make investments in 2023 to further accelerate growth.

Too much of a good thing

On the other hand, I’m conscious of the fact that the business has already grown rapidly in recent years. It’s easy to grow metrics fast when a firm is small. Yet Greggs might struggle moving forward to achieve the same kind of numbers. After all, there’s only so many Greggs stores that need to be opened. There’s only so many sausage rolls that customers will demand.

Another point I’ve noted is that the price-to-earnings ratio is at 23.24. Although this isn’t crazily high, it’s definitely much further outside of my target area of a ratio of 10 for a good value buy. It can be argued that this is a growth stock, so naturally it carries a higher ratio based on future earnings expectation. However, I do need to be mindful of buying a potentially overvalued stock.

The cost-of-living crisis could impact sales this year. Yet on balance, Greggs isn’t a luxury brand. If anything, I think demand could increase as customers switch from more expensive alternatives to buying Greggs products instead!

A further rally inbound?

I feel the Greggs share price could really push higher this year and beyond. This is based on the growth forecasts and strategy outlined in the annual report. As far as the share price goes, if it can make new highs then the next price I’ll be looking for is the January 2022 price of 3,400p.

I’m looking to buy some Greggs shares with free cash later this month.

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.

Jon Smith has no position in any of the shares mentioned. 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.

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