Could Greggs ever gain promotion from the FTSE 250?

Greggs is a growth-focused company that appears to be excelling despite a tough market and prevailing trends. But could it break out of the FTSE 250?

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Every quarter, FTSE 250 companies that exceed the value of their counterparts in the FTSE 100 are promoted. And right now, the 100th largest listed company in the UK is worth £3.58bn. So, is Greggs (LSE:GRG) anywhere near reaching that value and joining the blue-chip index?

Market cap and valuation

Greggs currently has a market cap of £2.78bn, making it the 124th most valuable stock on the index. So, it’s some distance off the FTSE 100 — 28% to be precise. However, it’s worth recognising that the stock has traded significantly higher than it is today. At its peak, Gregg was worth around £3.4bn. That’s almost enough to be on the FTSE 100 today.

So, is it possible that we could see Greggs shares surge 28% and put the stock in contention for promotion. Well, the sausage roll seller is currently trading at 21.9 times basic earnings given the forecast earnings per share of 136.2p.

Moving forward, the company’s earnings per share are expected to push up to 149.68p in 2025. In turn, this takes the price-to-earnings ratio for 2025 to 19.2 times. That’s quite expensive for a company in a non-tech, not-high-growth sector, but Greggs is demonstrating impressive growth.

However, I think it’s trading at peak multiples given its growth potential. Assuming it can continue growing around 10% throughout the medium term, it would still have a price-to-earnings-to-growth (PEG) ratio around 2.19 — that’s not a good sign.

There’s a dividend yield of 2.2%, which does offset this rather high PEG ratio — the PEG ratio is imperfect when a stock pays dividends. Personally, I still believe Greggs can’t trade much higher unless it continues to beat expectations.

It’s something of a cult favourite. I used to love the occasional Greggs, and its pricing is impressive. And I think there’s evidence to suggest that it has performed well in a challenging market where customers have less money to spend. In fact, in Q3/Q4 2022, Greggs said that sales jumped 15% as food prices and energy bills soared.

While it’s clearly positive that it can tap into consumer needs during a tough economic period, I can’t help but feel that the sausage roll maker is running against long-term trends in healthy eating. I may be an obsessive case myself, but I’d expect more and more people to turn away from ultra-processed foods and high saturated fat products like sausage rolls in the long run.

There’s a two-pronged risk here. Firstly, we may see customer habits change naturally thanks to the research and works of experts like Chris van Tulleken (author of a bestseller about ultra-processed foods). But equally, we may see regulatory change that will push business to either move with the times or fail.

Personally, I don’t believe there are enough catalysts to see Greggs reach the FTSE 100. But, as always, I could be proved wrong.

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.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Greggs Plc. 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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