Greggs shares: 3 reasons to like them

Christopher Ruane sees a trio of reasons to feel positive about Greggs’ shares, so why’s he holding off buying some for his portfolio?

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The high street bakery chain Greggs (LSE: GRG) knows how to serve up a tasty treat or two. Not only is that true of the company’s pastries, but the price performance of Greggs’ shares has been pretty tasty too.

Over the past five years, the share price has grown by a tidy 54%.

Created with Highcharts 11.4.3Greggs Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Here are a trio of reasons I like Greggs shares:

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1. Strong competitive advantage in enduring market

When investing, Warren Buffett looks for companies that operate in a large, enduring market that have some competitive advantage that can give them pricing power.

The market for simple snacks and meals is large and likely to stay that way.

However, it is also very crowded. That is where I think Greggs’ distinctive offering is helpful. A well-known brand with a large network of shops, it offers a range of products that are different enough from a typical bakery to set it apart.

That gives it pricing power which, in turn, helps profitability. Last year, for example, the company made a post-tax profit of £143m on turnover of £1.8bn. That equates to a net profit margin of 7.9%.

2. Proven business model

The idea of building a business empire based on hundreds of shops selling sausage rolls and sandwiches might not sound like the stuff of commercial genius. In fact though, I think the business model at Greggs is attractive.

The company has economies of scale thanks to the size of its shop estate. By using centralised kitchens for much of its food production, it is able to benefit from those economies of scale while maximising the utilisation of costly prime retail sites.

Greggs understands exactly what its customers like and so can optimise its product offering, run suitable promotions and peg its pricing at an acceptable level. The business model is well proven.

3. Massive untapped potential

Buying Greggs shares today would help expose me to future growth. I think there is a lot of further potential in the British Isles. The company is targeting 3,000 shops in the UK alone.

Personally though, I reckon the concept could work well in multiple overseas markets, from the Netherlands to New Zealand and Canada.

That is not currently a priority for Greggs, but the prospect is something I think could help boost the long-term investment case.

I like Greggs but I’m not buying for now

There are risks, of course. Shifting work patterns threaten the profitability of some shops in commercial areas, while shifting tastes mean that Greggs’ style of products could fall out of fashion.

But I would happily own the shares – if I could buy them at the right price.

With a current valuation of 24 times earnings however, the shares do not offer me a very tasty deal for now, I reckon. So I will keep the name on my watchlist, without any immediate plans to take a bite.

But there may be an even bigger investment opportunity that’s caught my eye:

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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.

C Ruane 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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