Warren Buffett taught the world that riches can be made by investing in simple businesses. I think he’d agree that this is a FTSE 250 company almost all of us can understand. As the famous investor Peter Lynch once said, “Invest in what you know.” Thankfully, I think we all know Greggs (LSE:GRG) if we live in Britain.
From past returns to future profits
Over the past 10 years, Greggs has had an annual return of almost 44% on average, which places it at the top of the 250 businesses in the group.
As we can see from the chart above, Greggs has way outperformed the index. And here’s why I think it’s positioned to continue to do so.
The company has an ambitious goal to double sales over the next five years, and it plans to do this through three critical steps:
- Growing its real estate by surpassing 3,000 shop locations
- Extending trade into the evening, capturing a wider customer base
- Offering an app, click and collect, and delivery through Just Eat
Additionally, it is considering the possibility of opening stores outside of the UK for the first time. This would be a huge positive for shareholders, and it could mark the dawn of an exciting new era of growth.
However, international expansion is never easy. There is a risk that Britain’s booming baked goods business isn’t such a hit overseas. It’s up to management to do effective market research to ensure the business is positioned properly in its target countries.
In-demand food and in-demand shares
Like most popular businesses, Greggs shares are about as popular as its food. I consider the valuation a moderate risk simply because the price seems to have little margin for error in it.
However, I often prefer a fast-growing business selling at a reasonable price to a cheap investment that’s not going anywhere.
The shares have a price-to-earnings ratio of around 21, which is high enough to make me apprehensive. But, the valuation might be justified because earnings estimates for the business show high growth for the next few years. Let’s just hope the business performs as expected.
A stable balance sheet
I always look for security in a company’s financials, and my favourite place to get a snapshot of how healthy an organisation might be is the balance sheet.
From this, I can tell that Greggs has just slightly more liabilities than equity. Usually, I don’t like any more than half of assets balanced by different forms of debt.
As Greggs has such strong results for its industry, like a net margin of 8% and 9% revenue growth as an average over the past three years, I can make an exception. After all, the company has usually had more equity than liabilities over the past decade, and I think its higher levels of debt right now will largely be due to the expansion strategies I discussed above.
To buy or not to buy?
I think this is one of the best investments in Britain. But, as an investor who also focuses on ethics, I’m slightly cautious of how healthy the food is for consumers. That’s the only reason I’m not buying it.
However, it’s hard to deny how good the financial results are. For now, this one’s going on my watchlist.
