FTSE 250 constituent Greggs (LSE: GRG) has been a top performer on the index. In the last decade, its shares have risen a staggering 464.4%. By comparison, the FTSE 250’s up just 30%.
This year, they’ve also outperformed the index. The Greggs share price has climbed 16.4%. The FTSE 250, on the other hand, is up 4.4%.
But this impressive growth has me wondering what could be next for the sausage roll maker? Is there any value left to squeeze out of its share price? That’s what I want to answer.
Valuation
Let’s begin with its valuation. That will give us a good base to work with. I’m going to assess Greggs using the key price-to-earnings (P/E) ratio.
As shown below, the stock trades on a P/E of 22.6. The FTSE 250 average is around 12. Based on that, Greggs looks expensive.
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But what if we look ahead? Arguably, that’s more important. Well, its forward P/E, as seen below, paints a similar picture. While it’s cheaper, that’s not by much. Its forward P/E is 21.3.
Created with TradingView
The business
So it may look like Greggs is overvalued today. But the firm’s growth in recent years has been brilliant. What’s to say it doesn’t keep up this strong performance? If it does, that will most certainly translate into a rising share price, right?
Its latest results are a testament to its growth trajectory. For the first half of the year, sales rose 13.8% to £960.6m, while profit before tax was up 16.3% to £74.1m. Its interim dividend also rose a healthy 18.8% to 19p.
That means the business continued with its fine form from last year. During 2023, total sales climbed 19.6% to £1.8bn. Profit before tax also jumped 13.1% to £167.7m.
That’s even with the tough economic conditions we’ve faced in recent times, such as a cost-of-living crisis. That said, it was always likely that a business like Greggs, which focuses on providing an affordable menu, was set to thrive during these times. Its results certainly show that.
Long-term trends
But as a long-term investor, there’s an issue that concerns me. There’s been a large push to promote healthier eating habits in recent years.
Many consumers are now more conscious than ever about what sort of foods they put in their body. While it may taste nice, the ultra-processed food Greggs has to offer doesn’t align with a healthy lifestyle.
Plans for growth
Of course, that’s discrediting the fact that Greggs is a business with incredibly strong brand recognition and big plans for growth. It opened 51 net new stores in the first half of 2024. It plans to open 140-160 new stores for the whole of the year. Going forward, Greggs has its sights set on opening up to 3,500. It currently has just under 2,500.
Better opportunities
But even considering that, I’m cautious. And with its shares looking expensive, I’ll be steering clear of Greggs. For now, it’ll stay on my watchlist. I see better opportunities in the FTSE 250 I plan to capitalise on.
