Few companies have risen as rapidly as Greggs (LSE: GRG) shares in the market lately. The purveyor of sausage rolls and vegan alternatives has seen its share price soar by nearly 30% over the past year. So, is this high-street hero running out of steam, or is there still room for growth?
Impressive growth
The company has come a long way from its humble beginnings as a Tyneside bakery. Today, it’s a FTSE 250 powerhouse with a market capitalisation of £3.24bn. The transformation from a local favourite to a national brand has been nothing short of remarkable, driven by savvy marketing, product innovation, and an uncanny ability to tap into changing consumer tastes.
Let’s dig into some of the numbers. The recent impressive run has pushed the company’s price-to-earnings (P/E) ratio to 23.3 times, suggesting investors are willing to pay a premium for a slice of this pastry paradise.
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So, what’s fuelling this growth? Management has been adept at expanding market share across various sectors, effectively transforming from a lunchtime pitstop to an all-day dining destination. The potential roll-out of iced drinks could drive incremental near-term volumes, with a strong profit contribution due to being VAT-exempt.
Moreover, a vertically integrated supply network, complete with its own bakeries and delivery system, gives it a significant advantage in controlling costs and maintaining quality across the country. This operational efficiency has allowed the firm to navigate the choppy waters of inflation and supply chain disruptions much more smoothly than many of its peers.
Some concerns
However, it’s not all smooth sailing in the land of steak bakes and sausage rolls. Management has identified some challenges that could potentially put the brakes on its rapid ascent. The company has highlighted a “challenging market” ahead and slower footfall trends, which could impact future growth.
Although annual earnings are expected to growth by a steady 7.7% for the next three years, gross margin is reportedly “structurally different” to pre-pandemic levels. Although this has only dropped from 8.1% to 7.1% in the last year, investors may get nervous that further declines are ahead over the long term.
On one hand, management has demonstrated an impressive ability to adapt to changing consumer preferences and navigate challenging economic conditions. Strong brand recognition and efficient operations provide a solid foundation for future growth.
On the other hand, the current valuation suggests that much of this potential is already baked into the share price. With a P/E ratio of 23.3 times, the company isn’t exactly in the bargain bin, and any stumbles in execution could lead to a sharp decline.
I’m looking elsewhere
Greggs has proven itself to be more than just a flash in the pan, transforming from a regional bakery into a national food-on-the-go powerhouse. While the company’s growth story is impressive, I think investors should approach with a balanced perspective. The potential for further expansion and product innovation is tempting, but the high valuation and potential market challenges suggest caution.
I suspect this giant of the high street will be with us for some time, but think Greggs shares might be priced fairly accurately at present. I think there are better opportunities elsewhere, so I’ll be passing for now.
