Buying shares in a company that can perform well through good times and bad can be incredibly challenging. Greggs (LSE:GRG) shares have soared 167% since 2018 during some of the most difficult and uncertain periods in recent memory.
An investment of £1,000 would now be worth an incredible £2,670. So is there more growth ahead?
Greggs is a British bakery chain with over 2,000 stores in the UK and Ireland. Founded in 1939, it has become one of the most popular fast food chains in the UK.
In the past five years, the company has grown its earnings by an average of 16% per year. Earnings per share have also grown by an average of 15% per year. This far outperforms the hospitality sector average, which is a 1% decline. Greggs’s dividend payments have also increased steadily, with further growth expected in the future.
Are Greggs shares still appealing?
Greggs shares have had a tremendous run in recent years. Further, there is clear potential for this to continue:
- Strong track record of growth: Growth has been driven by a number of factors, including the expansion of the company’s store network, the introduction of new products, and the growth of its online business.
- Debt-free: With interest rates climbing, having a balance sheet free of debt allows the company to invest and return value to shareholders, instead of making interest payments.
- Effective use of investment: With a return on equity (ROE) of 26.7% expected in the next three years, the company is considerably more effective at putting money to work than the broader sector, with an average of 9%.
- Strong brand and loyal customer base: Greggs has a strong brand and a loyal customer base. The company’s brand is built on its reputation for quality, value, and convenience. Customers are generally repeat customers, who are very familiar with the company’s products and services.
- Dividend payer with a growing dividend: The company’s dividend is well covered by its earnings, which is likely to continue to grow in the future.
- Experienced management: With an average of 12 years experience in the company, the management team have a strong understanding of the sector. The current CEO, Roisin Currie, previously led operations for major retail companies.
What are the risks?
- Rising food costs: Greggs is heavily exposed to rising food costs. The company’s costs of goods sold are a significant component of its expenses, and rising food costs due to inflation is likely to reduce profits.
- Competition from other fast food chains: Greggs faces competition from other fast food chains. These companies have a larger store network than Greggs, offering a wider range of products.
- Changes in consumer tastes: Greggs could be affected by changes in consumer tastes. If consumers become more health conscious, they may be less likely to eat at Greggs.
- Valuation: Greggs shares have a price-to-earnings (P/E) ratio of 21, above the sector average of 18 times, indicating shares may be overvalued following recent growth.
Am I buying?
Overall, Greggs is a well-managed company with a strong track record of growth. The company is also a consistent dividend payer with a growing dividend. However, with rising food costs, and risks from competition with larger international operations, I will not be buying Greggs shares at these prices.
