The FTSE 250 is filled with bargain-buying opportunities right now. But not all of them are obvious. A common tactic used by value investors is to filter through potential value stocks using metrics like the price-to-earnings (P/E) ratio. But those relying on this method have likely missed the cheap Greggs (LSE:GRG) share price.
On the surface, the baked goods retail chain looks priced like most growth enterprises, with a P/E of 20. For reference, the market average typically lies between 10 and 15. Yet after drawing back the curtain, this looks like a bargain, in my eyes, considering what’s just happened and what’s on the horizon.
The king of breakfast
For workers on the go, Greggs has become a favourite destination for snapping up a low-priced, tasty, hot breakfast of sausage rolls, pasties, sandwiches, and other baked goods. In fact, as per its latest results, Greggs is officially the most popular breakfast takeaway retailer in the UK, surpassing even McDonald’s in terms of market share.
2023 was the best year in the firm’s history, with sales and profits reaching an all-time high. But what’s more impressive is that this was achieved during a time of inflationary cost pressure, especially when it comes to worker salaries.
For most companies, the simple solution to this is to just raise prices. Yet apart from a 5p price hike on a few products, management absorbed most of this increased expense finding alternative ways to improve efficiency. As such, the sales growth actually stems from higher product volumes.
In other words, Britain’s love for sausage rolls is still climbing. And with an expanding network of almost 2,500 locations, Greggs is more than happy to oblige.
What to do about inflation
Greggs’ decision not to significantly raise prices may not be as benevolent as it seems. With a reputation for offering cheap products, management’s hands are somewhat tied in how much inflation cost it can pass on to customers.
This limitation has led to improvements in operational efficiency, which is a lovely sight. But there are always limits as to how far this can go. And with wages expected to continue rising, the group’s roster of 32,000 employees could become a far larger financial burden moving forward.
But does it merit the firm’s cheap price?
A closer look at the valuation
As previously mentioned, the FTSE 250 stock seems expensive when looking at earnings multiples. However, a distinct drawback of these ratios is the lack of foresight. Management has outlined its plans to open at least 3,000 locations across the country. And based on the number of stores it’s planning to open in 2024, we may be just a few short years away from reaching this goal.
Pairing this with the fact that revenue is on track to reach £2.5bn by 2026 incidates the growth story for this business is far from over. And as a highly cash-generative enterprise with a money-savvy management team, I’m confident the group will keep delivering.
That’s why, at a P/E of 20, Greggs’ shares look under-appreciated to me. That’s why I plan to add this business to my portfolio once I have more capital available.
