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%.
Here are a trio of reasons I like Greggs shares:
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.
